{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

This preview shows pages 1–2. Sign up to view the full content.

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 basis points. e.What would the duration of the assets need to be to immunize the equity from changes in market interest rates? a. What is the leverage-adjusted duration gap of Financial Institution XY? The duration of the capital note is 1.8975 years. Two-year Capital Note (values in thousands of \$s) Par value = \$900 Coupon rate = 7.25% Semiannual payments R = 7.25% Maturity = 2 years Time Cash Flow PV of CF PV of CF x t 0.5 \$32.625 \$31.48 \$15.74 1 \$32.625 \$30.38 \$30.38 1.5 \$32.625 \$29.32 \$43.98 2 \$932.625 \$808.81 \$1,617.63 \$900.00 \$1,707.73 Duration = \$1,707.73/\$900.00 = 1.8975 The leverage-adjusted duration gap can be found as follows: b.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern