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% $550M 4.562 12.026 (lending money) 12yr bond bought at a yield of 4% $800M 53.565 (lending money) 9.453 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) $500M 4yr bond sold at a yield of 2.8% (borrowing money) 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) %3D b) Calculate the duration and convexity of the both asset and liability sides; c) Do you agree with the following statement? Explain why. "The information about a bond's duration and convexity adjustment is sufficient to quantify interest rate risk exposure."
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% $550M 4.562 12.026 (lending money) 12yr bond bought at a yield of 4% $800M 53.565 (lending money) 9.453 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) $500M 4yr bond sold at a yield of 2.8% (borrowing money) 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) %3D b) Calculate the duration and convexity of the both asset and liability sides; c) Do you agree with the following statement? Explain why. "The information about a bond's duration and convexity adjustment is sufficient to quantify interest rate risk exposure."
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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Transcribed Image Text: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% $550M
4.562
12.026
(lending money)
12yr bond bought at a yield of 4%
$800M
53.565
(lending money)
9.453
Liabilities
Value
Duration of the Liability Convexity of the Liability
2yr bond sold at a yield of 2.4%
$300M
1.941
2.384
(borrowing money)
$500M
4yr bond sold at a yield of 2.8%
(borrowing money)
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)
%3D
b) Calculate the duration and convexity of the both asset and liability sides;
c) Do you agree with the following statement? Explain why.
"The information about a bond's duration and convexity adjustment is sufficient to quantify
interest rate risk exposure."
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