Formulas for Test 2 2012

Formulas for Test 2 2012 - Formulas for Test 2: FINA 465...

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Formulas for Test 2: FINA 465 Chapter 8 1) Change in interest rate in the i th bucket: NII i = (GAP i ) R i = (RSA i - RSL i ) R i Chapter 9 2) The price of a bond is the present discounted value of all future cash flows. P = Σ n t=1 [CF t /(1+R) t ] 3) The duration of any fixed-income security that pays interest annually is given by: D = Σ n t=1 [CF t • t/(1+R) t ] / Σ n t=1 [CF t /(1+R) t ] => D = Σ n t=1 [PV t • t] / Σ n t=1 [PV t ] D = duration measured in years CF t = cash flow received at the end of period t n = last period in which cash-flow is received R = is the annual yield or current level of interest rates in the market PV t = present value of the cash flow from period t 4) The change in price for a small change in interest rate: ΔP = -D[ΔR/(1+R)]P 5) Duration of assets: D A = X 1A D 1A + X 2A D 2A + … + X n A D n A Duration of liabilities: D L = X 1L D 1L + X 2L D 2L + … + X m L D m L Where X i A and X i L are the market value proportions of each asset or liability held in the
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Formulas for Test 2 2012 - Formulas for Test 2: FINA 465...

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