2. Mr. Astuto Desfalcador, CFO of the Novedades Corporation, Canada's largest manufacturer of party favors, is...

 

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2. Mr. Astuto Desfalcador, CFO of the Novedades Corporation, Canada's largest manufacturer of party favors, is concerned about the degree of interest rate risk posed by his firm's current balance sheet Desfalcador observes that his firm currently has a portfolio of assets worth $50,000,000.00, and you have recently calculated the duration of the asset portfolio to be 4 while the duration of the set of liabilities of Novedades is 1. He asks you, as his financial advisor and company troglodyte, to make the following calculations on the basis of compound interest: a. If interest rates suddenly rise today by one percent at each future date, what will the asset portfolio be worth? b. If the total current value of liabilities for Novedades is $45,000, 000.00, and interest rates today rise by one percent at each future date, what will the subsequent value of its liabilities be? c. Assuming the same current values of assets and liabilities, what will the equity value of Novedades be under an unexpected rise in interest rates of fifty basis points? d. Assuming the same current values of assets and liabilities, what will the equity value of Novedades be under an unexpected fall in interest rates of eighty basis points? e. Using the duration values for assets and liabilities you have calculated and given the current asset value of Novedades remains at $50, 000, 000.00, at what value of liabilities would Novedades become insolvent if interest rates suddenly rise by one percent? 2. Mr. Astuto Desfalcador, CFO of the Novedades Corporation, Canada's largest manufacturer of party favors, is concerned about the degree of interest rate risk posed by his firm's current balance sheet Desfalcador observes that his firm currently has a portfolio of assets worth $50,000,000.00, and you have recently calculated the duration of the asset portfolio to be 4 while the duration of the set of liabilities of Novedades is 1. He asks you, as his financial advisor and company troglodyte, to make the following calculations on the basis of compound interest: a. If interest rates suddenly rise today by one percent at each future date, what will the asset portfolio be worth? b. If the total current value of liabilities for Novedades is $45,000, 000.00, and interest rates today rise by one percent at each future date, what will the subsequent value of its liabilities be? c. Assuming the same current values of assets and liabilities, what will the equity value of Novedades be under an unexpected rise in interest rates of fifty basis points? d. Assuming the same current values of assets and liabilities, what will the equity value of Novedades be under an unexpected fall in interest rates of eighty basis points? e. Using the duration values for assets and liabilities you have calculated and given the current asset value of Novedades remains at $50, 000, 000.00, at what value of liabilities would Novedades become insolvent if interest rates suddenly rise by one percent?

Answer rating: 100% (QA)

a The asset portfolio will be worth 4934749840 Duration of asset portfolio 4 Duration of liabilities 1 Total duration 4 1 3 If interest rates rise by ... View the full answer