(c) 10 immunize itself from interest rate risk, the FI plans to restructure its asset bond by adjusting its face value and coupon rate, while keeping the bond's value (and hence the market value of asset), maturity and yield unchanged. What should be the new face value and coupon rate? (Hint: Write out and solve two equations, one for matching the market value of assets before and after the restructuring, and the other for eliminating the leverage-adjusted modified duration gap after the restructuring.) (d) Assume the immunization in (c) is successfully implemented. Immediately after the implementation, the yields of both bonds decrease from 4% to 3.9%. What are the market values of asset, liability and equity now?
(c) 10 immunize itself from interest rate risk, the FI plans to restructure its asset bond by adjusting its face value and coupon rate, while keeping the bond's value (and hence the market value of asset), maturity and yield unchanged. What should be the new face value and coupon rate? (Hint: Write out and solve two equations, one for matching the market value of assets before and after the restructuring, and the other for eliminating the leverage-adjusted modified duration gap after the restructuring.) (d) Assume the immunization in (c) is successfully implemented. Immediately after the implementation, the yields of both bonds decrease from 4% to 3.9%. What are the market values of asset, liability and equity now?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Solve c and d part only in one hour plz solve this now in one to 2 hour if u can't solve then reject this now in 2 hours so that I can't wait for your answer plz
Transcribed Image Text:2. (Immunization of FI) Consider a financial institution whose asset and liability
both consist of coupon bonds only. The asset is a 10-year bond with face value
$100 million, coupon rate 9.8% and yield 4%, while the liability is a 15-year
bond with face value $100 million, coupon rate 8.2% and yield 4%. Both bonds
pay coupon semiannually. Assume parallel yield shift.
Required precision: 4 digits after decimal point for duration calculation; 2 digits
after decimal point for dollar amount in million, e.g. $12.34 million; 4 digits
after decimal point for percentage (coupon) rates, e.g. 1.2345%.
(a) What are the market values of asset, liability and equity of this FI? What
is its leverage-adjusted modified duration gap?
(b) According to the duration model, what would the market value of equity
be for a 10 basis points decrease in the yield?
1
(c) 10 immunize itself from interest rate risk, the FI plans to restructure its
asset bond by adjusting its face value and coupon rate, while keeping the
bond's value (and hence the market value of asset), maturity and yield
unchanged. What should be the new face value and coupon rate? (Hint:
Write out and solve two equations, one for matching the market value of
assets before and after the restructuring, and the other for eliminating the
leverage-adjusted modified duration gap after the restructuring.)
(d) Assume the immunization in (c) is successfully implemented. Immediately
after the implementation, the yields of both bonds decrease from 4% to
3.9%. What are the market values of asset, liability and equity now?
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