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 $300M 2yr bond sold at a yield of 2.4% (borrowing money) 1.941 2.384 4yr bond sold at a yield of 2.8% $500M 3.759 8.206 (borrowing money) a) 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; b) In a)'s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?

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 $300M 2yr bond sold at a yield of 2.4% (borrowing money) 1.941 2.384 4yr bond sold at a yield of 2.8% $500M 3.759 8.206 (borrowing money) a) 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; b) In a)'s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 1bM

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Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset Syr bond bought at a yield of 3.4% $55OM (lending money) 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $80OM 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability Zyr bond sold at a yield of 2.4% (borrowing money) 4yr bond sold at a yield of 2.8% (borrowing money) $300M 1.941 2.384 $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 ratic d) Incys scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero…
Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset $550M 12.026 Syr bond bought at a yield of 3.4% (lending money) 4.562 12yr bond bought at a yield of 4% $800M 9.453 53.565 (lending money) Value Duration of the Liability Convexity of the Liability Liabilities Zyr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) 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; d) Inc's scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero…
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% (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 Liability2yr 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 Calculate the duration and convexity of the both asset and liability sides;
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 Liability2yr 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 If the interest rates go up by 1%, using the duration and convexity rule to determine the networth of the bank and the equity to asset ratio
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 Required a) Calculate the equity (total asset – total liability) to asset ratio of the bank 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; D) In c)’s scenario, to maintain the equity to asset ratio at 40% which is…
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 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; In 1)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. If the equity to asset ratio in 1) was worked out to be 0.38 how would you work out question 2.
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) 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 B) In A)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise? I would like for B to be solved, thank you.
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 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; In 1)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?
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 Required Please answer the Subparts D and E only. a) Calculate the equity (total asset – total liability) to asset ratio of the bank 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; D) In c)’s scenario, to maintain the…
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 Required- Please answer question D and E only, A B C have been answered by yourself. a) Calculate the equity (total asset – total liability) to asset ratio of the bank 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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