Prep Exam 1 An - Financial Institutions Management Preparation for Exam 1(20 Sept 2011 Question 5 from Tutorial 4 Financial Institution XY has

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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 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
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This note was uploaded on 03/11/2012 for the course FIN FIN 3230 taught by Professor Petrivanov during the Spring '12 term at Kazakhstan Institute of Management, Economics and Strategic Research.

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Prep Exam 1 An - Financial Institutions Management Preparation for Exam 1(20 Sept 2011 Question 5 from Tutorial 4 Financial Institution XY has

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