Brothers Bank has a $1.7 million position in a five-year, zero-coupon bond with a face value of $2 million. The bond is trading at a yield to maturity of 4.5 per cent. The historical mean change in daily yields is 0.0 per cent, and the standard deviation is 10 basis points. Calculate the following (round to four decimal places): A. Modified Duration. B. What is the maximum adverse daily yield move given that we desire no more than a 1 per cent chance that yield changes will be greater than this maximum? C. Price volatility.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Brothers Bank has a $1.7 million position in a five-year, zero-coupon bond with a face value of $2 million. The bond is trading at a yield to maturity of 4.5 per cent. The historical mean change in daily yields is 0.0 per cent, and the standard deviation is 10 basis points.
Calculate the following (round to four decimal places):
A. Modified Duration.
B. What is the maximum adverse daily yield move given that we desire no more than a 1 per cent chance that yield changes will be greater than this maximum?
C. Price volatility.
D. DEAR.
E. VaR for a 12-day period.
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