4. This Information will be used for all the following questions. Bank Dynasty has the following...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
4. This Information will be used for all the following questions. Bank Dynasty has the following balance sheet in market value: Assets (mil$) Cash 8-yr Loan 5-yr Floating-Rate Loan (reset every 0.5 year) Total Assets 40 150 110 Liabilities & Eqt (mil$) Demand Deposits 60 70 140 30 300 1-yr Debt 10-yr Debt Equities 300 Total Liab. & Eqt. Further information: (1) Assume there is no default risk in all the loans and debt. All loans and debt are non-amortizing. (2) The 8-year loan and the 1-year debt are zero-coupon loan/debt and compounding annually. The 5-year floating-rate loan and the 10-year debt pay coupons semi-annually. (3) The 8-year loan has yield of 10%. The yield of the 1-year debt is 5%. The 5-year floating-rate loan has the coupon rate and yield equals to SIBOR (currently 5%) plus 4%. And the yield of the 10-year debt is 12%. All rates are annual rates. (4) The 10-yr debt has a face value of 150 mil$. [Round your answers to 4 decimal places for this question. 20 marks in total.] A) What is the modified duration for the 10-yr debt? (5 marks) B) What is the modified duration gap of this bank? (5 marks) C) If the market interest rate is expected to increase by 0.5% for all maturity, what is the expected impact on the bank's market value of equities? (3 marks) D) The bank decides to restructure its liabilities to hedge the interest rate risk. The CFO is told that only the accounts in the 1-yr and 10-yr debts can be changed to do Asset-Liability Management (ALM) for modified duration immunization. Other accounts including the demand deposits and the equities, as well as the size of the balance sheet, cannot be changed. How may the bank achieve that? (7 marks) 4. This Information will be used for all the following questions. Bank Dynasty has the following balance sheet in market value: Assets (mil$) Cash 8-yr Loan 5-yr Floating-Rate Loan (reset every 0.5 year) Total Assets 40 150 110 Liabilities & Eqt (mil$) Demand Deposits 60 70 140 30 300 1-yr Debt 10-yr Debt Equities 300 Total Liab. & Eqt. Further information: (1) Assume there is no default risk in all the loans and debt. All loans and debt are non-amortizing. (2) The 8-year loan and the 1-year debt are zero-coupon loan/debt and compounding annually. The 5-year floating-rate loan and the 10-year debt pay coupons semi-annually. (3) The 8-year loan has yield of 10%. The yield of the 1-year debt is 5%. The 5-year floating-rate loan has the coupon rate and yield equals to SIBOR (currently 5%) plus 4%. And the yield of the 10-year debt is 12%. All rates are annual rates. (4) The 10-yr debt has a face value of 150 mil$. [Round your answers to 4 decimal places for this question. 20 marks in total.] A) What is the modified duration for the 10-yr debt? (5 marks) B) What is the modified duration gap of this bank? (5 marks) C) If the market interest rate is expected to increase by 0.5% for all maturity, what is the expected impact on the bank's market value of equities? (3 marks) D) The bank decides to restructure its liabilities to hedge the interest rate risk. The CFO is told that only the accounts in the 1-yr and 10-yr debts can be changed to do Asset-Liability Management (ALM) for modified duration immunization. Other accounts including the demand deposits and the equities, as well as the size of the balance sheet, cannot be changed. How may the bank achieve that? (7 marks)
Expert Answer:
Answer rating: 100% (QA)
AWhat is the modified duration for the 10yr debt To derive the modified duration of the 10debt we need to solve for its coupon payment P FV1 y T Cy1 1... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
The below information will be used for the next two questions. A Company issued a bond payable with detachable warrants on the interest payment date as follows. Bond payable ($1,000 par value; 400...
-
The new UltraGuard flea collar is about to be introduced to the market. The collar will feature enhanced protection, increased longevity and is environmentally friendly. It will be priced at $9.30...
-
Consider five main appliances in each home in a community microgrid you are currently working. The power factor of the system is 0.9 lagging. The microgrid has 30 homes. Assume appropriate ratting of...
-
What type of insurance policy insures against all risks of loss that are not specifically excluded by the policy? OA) Binder policy OB) Named peril policy OC) Specified peril policy OD) Open peril...
-
A fly is crawling from left to right along the top of the curve y = 7 - x2 (Figure 5). A spider waits at the point (4, 0). Find the distance between the two insects when they first see each other. 7...
-
Use mesh analysis to determine current I o in the circuit of Fig. 10.79 below. lo j60 2 20 2 80 2 ll -j40 2 -j40 2 50/120 V 30/-30 V
-
Petitioner Christy Brzonkala met respondents Antonio Morrison and James Crawford at a campus party at Virginia Polytechnic Institute (Virginia Tech), where they were all students. At the party, the...
-
The management of Kunkel Company is considering the purchase of a $40,000 machine that would reduce operating costs by $7,000 per year. At the end of the machines eight-year useful life, it will have...
-
4. A pharma company you work for makes jars with cream. It claims that the average amount of cream in a jar is at least 90 g. To prove that claim to the customers you decide to test the claim at a...
-
Kicking It Corp. is planning to open a football camp in Arizona, which will require a land purchase and facilities development that includes fields, sleeping and dining facilities, maintenance...
-
The Auditing Standards Board, the Public Company Accounting Oversight Board, and the International Auditing and Assurance Standards Board are all auditing standard setters and they have issued...
-
CRIMINAL JUSTICE/LAW . Watch an episode of a scripted, crime drama. In a minimum of 1000 words, summarize the episode and compare and contrast it with the reality of the criminal justice system.?
-
Define hot pursuit, and explain why the High Court found it to be present in the case of U.S. v. Santana.?
-
List the 3 requirements of the law passed by the state of Louisiana that were the subject of the challenged by Plessy.?
-
Law enforcement needs "probable cause" in order to justify two different acts. What are the two different acts?
-
Identify a contemporary issue concerning the constitutional limitations on government in processing criminal cases and discuss the most likely future scenarios,referencing both historical analogs and...
-
Explain and demonstrate graphically, the short-run and long-run effects of an increase in the money supply using the AD-AS model.
-
Federated Shipping, a competing overnight delivery service, informs the customer in Problem 65 that they would ship the 5-pound package for $29.95 and the 20-pound package for $59.20. (A) If...
-
Write chemical equations showing how you could prepare m-bromonitrobenzene as the principal organic product, starting with benzene and using any necessary organic or inorganic reagents. How could you...
-
In each of the following reactions, an amine or a lithium amide derivative reacts with an aryl halide. Give the structure of the expected product, and specify the mechanism by which it is formed. (a)...
-
Write structural formulas for all the alkynes of molecular formula C8H14 that yield 3-ethylhexane on catalytic hydrogenation.
-
The marginal tax rate on a corporate income of \(\$ 87,000\) is closest to which of the following? a. 15 percent b. 20.5 percent c. 25 percent d. 34 percent
-
Calculate the corporate income tax for each of the following corporate taxable incomes. For each, determine the effective (average) tax rate and the marginal tax rate. a. $12,000 b. $65,000 c....
-
True or False: If the same amount of money is invested in something that can be expensed as in something that must be depreciated (and both provide the same annual returns) then you should choose the...
Study smarter with the SolutionInn App