Prep%20Exam%201%20 - basis points e.What would the duration...

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Financial Institutions Management Preparation for Exam 1 (20 Sept 2011) Question 5 from Tutorial 4 Financial Institution XY has assets of $1 million invested in a 30-year, 10 percent semiannual coupon Treasury bond selling at par. The duration of this bond has been estimated at 9.94 years. The assets are financed with equity and a $900,000, 2-year, 7.25 percent semiannual coupon note selling at par. a.What is the leverage-adjusted duration gap of Financial Institution XY? b. What is the impact on equity value if the relative change in all market interest rates is a decrease of 20 basis points? Note, the relative change in interest rates is R/ (1+R/2) = -0.0020. c.Using the information calculated in parts (a) and (b), what can be said about the desired duration gap for a financial institution if interest rates are expected to increase or decrease. d. Verify your answer to part (c) by calculating the change in the market value of equity assuming that the relative change in all market interest rates is an increase of 30
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Unformatted text preview: basis points. e.What would the duration of the assets need to be to immunize the equity from changes in market interest rates? Question 4 from Tutorial 5 An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed with $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has $50 million of auto loans with a fixed rate of 14 percent. The loans are financed with $50 million of CDs at a variable rate of LIBOR plus 4 percent. a. What is the risk exposure of the insurance company? b. What is the risk exposure of the finance company? c. What would be the cash flow goals of each company if they were to enter into a swap arrangement? d. Which FI would be the buyer and which FI would be the seller in the swap? e. Diagram the direction of the relevant cash flows for the swap arrangement. f. What are reasonable cash flow amounts, or relative interest rates, for each of the payment streams?...
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