In this case nii interest revenue interest expense 16

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Unformatted text preview: Changes in Rates • If changes in rates on RSAs and RSLs are not equal, the spread changes. In this case, Δ NII = Δ Interest Revenue – Δ Interest Expense 16 Example RSA rate rises by 1.2% and RSL rate rises by 1.0%, assuming RSA=RSL=$155 mln ∆ NII = 17 3. Duration Gap B/S (Market Values) If rates go up Assets Liabilities Equity could go down if……. Decrease in Assets > Decrease in Liabilities Safety Violation Equity? The longer the maturity► the greater the effect of interest rate risk 4 18 A. Macaulay Duration Σ t t * PV( Future CF)t D= Correct formula Σ t PV(Future CF)t =B Weighted average time to maturity using the relative present values of the cash flows as weights.. D = 1 * CF1/(1+r) + 2* CF2/(1+r)2 +…+T*CFT/(1+r)T B B B Based on elasticity of bon price with respect to interest rate ~ Measure of interest rate risk 19 Short Cut Formulas • ZCB = T years • Perpetual-Consol = (1+r)/r • Coupon Bond = C*{(1+r)/r}*PVIFA(r,T)+T* {Par-C/r}/(1+r)T B Question : Dur of ZCB vs Dur of Coupon Bond? 20 Properties ∂D <0 ∂C As C goes up ►D decreases ∂D <0 ∂ ytm ∂D ∂T...
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This note was uploaded on 03/12/2014 for the course FINE 442 at McGill.

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