week4 - Bank BankManagement Week4and5:InterestRateRisk(II)...

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ank Management Bank Management Week 4 and 5: Interest Rate Risk (II) 1/30/2012 1 NUS Business School, Nan Li
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oadmap Roadmap alue f Bonds Value of Bonds Term Structure Duration Model Readings: FIM 9, 8B, 9A 1/30/2012 2 NUS Business School, Nan Li
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Weaknesses of Repricing Model Weaknesses: nores market value effects Ignores market value effects Ignores off balance sheet cash flows Over aggregative gg g Within bucket mismatch can be substantial Ignores effects of runoffs Bank continuously originates and retires consumer and mortgage loans unoffs may be rate nsitive Runoffs may be rate sensitive. Homework: how to correct for runoffs? rge banks usually keep record of pricing Large banks usually keep record of repricing gap on any given days in the future 1/30/2012 3 NUS Business School, Nan Li
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ond Valuation Bond Valuation ook Value or historical value Book Value or historical value Market Value or market price of bond oupon payment, face value, maturity Coupon payment, face value, maturity Present value valuation Market value and Face Value Premium bond Par bond Discount bond 1/30/2012 NUS Business School, Nan Li 4
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ond Valuation Bond Valuation F R N F P ) , , ( : bond coupon zero = N R : bond coupon ) 1 ( + N R C F R C R C R N C F P ) 1 ( ... ) 1 ( 1 ) , , , ( : coupon annual 2 + + + + + + + = Relationship between P and F, C, N, R? What about semi annual coupon bond?
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ond Valuation Bond Valuation Coupon paid m times a year: ) , , , , ( m R N C F P ) / 1 ( / ... ) / 1 ( / / 1 / 2 Nm m R m C F m R m C m R m C + + + + + + + = 1 Nm Nm t F C + = ) ( ) ( ) / 1 ( ) / 1 ( 1 m m t PVIA F PVIFA C m R m R m + = + + = , / , / Nm m R Nm m R m
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ompounding Frequencies Compounding Frequencies terest rate usually quotes in (net) annual rate Interest rate usually quotes in (net) annual rate R 100 invest for n years at R per annum $100 invest for n years at R per annum, terminal value of the investment is Annual compounding: $100(1+R) n Compounded m times per annum: mn R 00 m ) 1 ( 100 $ +
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ompounding Frequencies Compounding Frequencies ompounding alue of $100 at the end Compounding Frequency m Value of $100 at the end of 1 year $ nually 10 000 Annually 1 110.000 Semiannually 2 110.250 uarterly 10 381 Quarterly 4 110.381 Monthly 12 110.471 Weekly 52 110.506 Daily 365 110.516 Continuous 110.517
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ompounding Frequencies Compounding Frequencies ontinuous compounding Continuous compounding ) exp( 100 $ ) 1 ( 100 $ lim n R R mn = + Convert a rate with compounding frequency of m mes per year to a continuous compounded rate m m times per year to a continuous compounded rate ) exp( 100 $ ) / 1 ( 100 $ n R m R c mn m = + ( r ) 1 ) / (exp( m R m R c m = ) / 1 ln( or m R m R m c + =
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alculate Yield to Maturity Calculate Yield to Maturity YTM: yield to maturity or expected rate of return C F C C + N YTM YTM YTM P ) 1 ( ... ) 1 ( 1 2 + + + + + + = Use spot rate to calculate bond prices: F C C C C + N N N N N R R R R R R R N F P ) 1 ( ) 1 ( ...
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This note was uploaded on 02/29/2012 for the course FINANCE FIN 3117 taught by Professor Lina during the Spring '12 term at National University of Singapore.

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week4 - Bank BankManagement Week4and5:InterestRateRisk(II)...

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