Suppose an FI has a long position in zero-coupon bonds of seven years to maturity with a face valueof $1,631,483. Today's yield on these bonds is 7.243 percent per year. These bonds are held as part ofthe trading portfolio.Suppose we define bad yield changes such that there is 1 chance in 20 (or a 5 percent chance) that thenext day's yield increase (or shock) will exceed this given adverse move. Assuming normality andsuppose that during the last year the mean change in daily yields on seven-year zero-coupon bondswas 0 percent while the standard deviation was 10 basis points.a) Estimate the dollar market value of positionb) Potential adverse daily yield movec) Estimate price volatilityd) Estimate daily earnings at riske) Estimate value at risk over a period of 10 days

Using the provided information and the zero-coupon bond pricing formula, we can calculate the dollar…

a) Estimate the dollar market value of position b) Potential adverse daily yield move c) Estimate price volatility d) Estimate daily earnings at risk e) Estimate value at risk over a period of 10 days

a) Estimate the dollar market value of position b) Potential adverse daily yield move c) Estimate price volatility d) Estimate daily earnings at risk e) Estimate value at risk over a period of 10 days

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose an FI has a long position in zero-coupon bonds of seven years to maturity with a face value
of $1,631,483. Today's yield on these bonds is 7.243 percent per year. These bonds are held as part of
the trading portfolio.
Suppose we define bad yield changes such that there is 1 chance in 20 (or a 5 percent chance) that the
next day's yield increase (or shock) will exceed this given adverse move. Assuming normality and
suppose that during the last year the mean change in daily yields on seven-year zero-coupon bonds
was 0 percent while the standard deviation was 10 basis points.
a) Estimate the dollar market value of position
b) Potential adverse daily yield move
c) Estimate price volatility
d) Estimate daily earnings at risk
e) Estimate value at risk over a period of 10 days

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Step 2: b) Potential adverse daily yield move:

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Step 3: c) Estimate price volatility:

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Step 4: d) Estimate daily earnings at risk:

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Step 5: e) Estimate value at risk over a period of 10 days:

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