Answered: ity bank has six-year zero coupon bonds…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

City bank has six-year zero coupon bonds with a total face value of $20 million. The current market yield on the bonds is 10 percent. Suppose that during last year the mean change in daily yields on six-year zero-coupon bonds was 25 basis points, while the standard deviation was 30 basis points. Yield changes are assumed to be normally distributed (critical value = 1.96 for 95% confidence interval)

Question 1: What is the maximum yield change expected if a 95 percent confidence interval is used?

Continue from Question 1, what is the daily earnings at risk (DEAR) of this bond portfolio?

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

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