Solution%20Quiz - Assets are more sensitive to change in...

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Quiz Solution Question 1 Bond A Bond B Bond C Coupon rate 8% 10% 12% Matutiry in years 5 5 5 Yeild to Maturity 10% 10% 10% a) Bond A - 8% coupon Period Cash Flows PV Duration 1 800 727 0.08 2 800 661 0.14 3 800 601 0.19 4 10800 7,377 3.15 Price, i.e. Market Value 9,366 Duration in years 3.56 Bond B - 10% coupon Period Cash Flows PV Duration 1 1000 909 0.09 2 1000 826 0.17 3 1000 751 0.23 4 11000 7,513 3.01 Price, i.e. Market Value 10,000 Duration in years 3.49 Bond C - 12% coupon Period Cash Flows PV Duration 1 1200 1,091 0.10 2 1200 992 0.19 3 1200 902 0.25 4 11200 7,650 2.88 Price, i.e. Market Value 10,634 Duration in years 3.42 b) Relationship: The higher coupon rate of the bond, the less its duration, other things being equal Question 2 Balance sheet of Company ABC Assets Market Value Duration Liabilities and Equity Market Value Duration 10,000 3.49 18,732 3.56 10,634 3.42 Equity 1,902 n/a Total assets 20,634 3.45 Total Liabilities and Equity 20,634 n/a a) Duration of assets 3.45 Duration of liabilities 3.56 Leverage coefficient 0.91 Duration GAP 0.22 Positive b) Since, duration of its Assets is higher than duration of Liabilities,
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Unformatted text preview: Assets are more sensitive to change in interest rates, i.e. decrease in the value of assets will be more than decrease in the value of liabilities Question 3 a) Effect on equity Duration gap 3.2 Assets 100,000 Relative change in int. rates 0.0075 Effect on equity (2,400) Loss b) Number of Future contracts Gain on Futures 2,400 Gain Duration of underlying bond 3.2 Quote price 92 Future contract size 1,000 Number of contracts 0.8 One contract Question 4 Rate sensitive assets 3000 Rate sensitive liabilities 2500 a)Expected increase in R 1% b)Expected increase in R-1% a) Repricing Gap 500 a) Change in NII 5 One 10% coupon bond, 4 yrs maturity, FV =1000, annually Two 8% coupon bonds, 4 yrs maturity, FV = 1000, annually One 12% coupon bond, 4 yrs maturity, FV =1000, annually Company ABC is exposed to increase in interest rates Equity = total assets - total liabilities...
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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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