Bond Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $800M 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% (borrowing money) $300M 1.941 2.384 4yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206 a) Calculate the equity (total asset – total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides;
Hello, I think there are errors in your solutions, I am not sure.
For (A), I think there might be an error.
In the ans it say 500m but in question it says 550m.
And in A it also says equity to asset ratio not asset to equity.
In (B), - in table 500m is mentioned but in q 550m.
- And for effective duration. (=X*A)
This means 500*38%, which gives us 190.
Please if there mistakes, can you correct them and get back to me. Much appreciated and thank you for your time.
This was the question asked.
Question 3.
Bond
Consider a bank with the following
Assets Value Duration of the Asset Convexity of the Asset
5yr bond bought at a yield of 3.4% (lending money) $550M 4.562
12.026
12yr bond bought at a yield of 4% (lending money) $800M 9.453
53.565
Liabilities Value Duration of the Liability Convexity of the Liability
2yr bond sold at a yield of 2.4% (borrowing money) $300M 1.941 2.384
4yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206
a) Calculate the equity (total asset – total liability) to asset ratio of the bank
(Hint: equity to asset ratio = total equity/total asset)
b) Calculate the duration and convexity of the both asset and liability sides;
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