Assume a 7-year, $5,000 par value bond payinga12% coupon annually and a YTM of 10%.The prime rate is 4%.There will be a charge of $20 in fees and will have a 14% compensating balance imposed.The reserve requirement is 11%.The Treasury Note is yielding 1.25%.If the loan defaults, the bank will recover 65% of its money.Assume there is a concern of an increase in yields of 4%.The ROE (cost of funds) is 6.5%.

This loan is combined in a portfolio with a second loan that contains a face value of $3,000.This second loan has a Moody's KMV Return of 3.5% and Moody's KMV Risk of 12%.The correlation of the two loans is -0.65 and the bank is willing to take a maximum of a 20% loss.The national average allocation for the first loan is 45% and the national average allocation for the second loan is 55%.

What is the Duration, Modified Duration and Dollar Duration of this bond?

What is the New Price that is predicted by the Duration Model?

What is the Convexity (CX) Factor?

What is the New Price that is predicted by the Convexity Model?

What is the Actual Price given the change in yields?

What is the error for the duration model?What is the error for the convexity model?

What is the Gross Return?

What is the Implied Probability of Default using the term structure of credit risk model?

Answer rating: 100% (QA)

Analyzing the Bond Portfolio This scenario involves a bond portfolio with two components and requires calculating various risk measures and potential ... View the full answer