#1

Financial Institution XY has assets of $1 million invested in a 30-year, 10 percent semiannual coupon Treasury bond selling at par. The duration of this bond has been estimated at 9.94 years. The assets are financed with equity and a $900,000, two-year, 7.25 percent semiannual coupon capital note selling at par.

What is the leverage-adjusted duration gap of Financial Institution XY?

page 264What is the impact on equity value if the relative change in all market interest rates is a decrease of 20 basis points?Note:The relative change in interest rates is R/(1 +R/2) = -0.0020.

Using the information in parts (a) and (b), what can be said about the desired duration gap for the financial institution if interest rates are expected to increase or decrease?

Verify your answer to part (c) by calculating the change in the market value of equity assuming that the relative change in all market interest rates is an increase of 30 basis points.

What would the duration of the assets need to be to immunize the equity from changes in market interest rates?

#2

Happy Lucky Bank has a $1 million position in a five-year, zero-coupon bond with a face value of $1,402,552. The bond is trading at a yield to maturity of 6.00 percent. The historical mean change in daily yields is 0.0 percent, and the standard deviation is 12 basis points. For an adverse daily yield of 1 percent - calculate the price volatility of this bond?

• A. 1.3278%
• B. 1.2935%
• C. 1.3065 %
• D. 1.3189%

#3

Marisa Gale, a 30-year-old personal loan officer at Second National Bank, understands the importance of starting early when it comes to saving for retirement. She has designated $3,500 per year for her retirement fund and assumes she'll retire at age 65. How much will she have if she invests in CDs and similar money market instruments that earn 4 percent on average? Round your answer to the nearest dollar. $ How much will she have if instead she invests in equities and earns 10 percent on average? Round your answer to the nearest dollar. $ Marisa is urging her friend, Nolan Ransom, to start his plan right away because he's 40. What would his nest egg amount to if he invested in the same manner as Marisa and he, too, retires at age 65? Round your answer to the nearest dollar. Nest egg amount at 4% = $ Nest egg amount at 10% = $