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; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio;
Question A, B and C is required.
Question 3.
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;
c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio;
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