A financial institution has to pay $1,000 after 2 years and $2,000 after 4 years. The...
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A financial institution has to pay $1,000 after 2 years and $2,000 after 4 years. The current market interest rate is 10%, and the yield curve is assumed to be flat at any time. The institution wishes to immunize the interest rate risk by purchasing zero-coupon bonds which mature after 1, 3 and 5 years. One member in the risk management team of the institution, Hashem, devised the following strategy: • Purchase a 1-year zero-coupon bond with a face value of $44.74 • Purchase a 3-year zero-coupon bond with a face value of $2,450.83 • Purchase a 5-year zero-coupon bond with a face value of $500.0 (a) Find the present value of the liability (b) Calculate the duration of the assets and liabilities. (c) Define S=VA-V₁, calculate S when there is an immediate one-time change of interest rate from 10% to 9%, A financial institution has to pay $1,000 after 2 years and $2,000 after 4 years. The current market interest rate is 10%, and the yield curve is assumed to be flat at any time. The institution wishes to immunize the interest rate risk by purchasing zero-coupon bonds which mature after 1, 3 and 5 years. One member in the risk management team of the institution, Hashem, devised the following strategy: • Purchase a 1-year zero-coupon bond with a face value of $44.74 • Purchase a 3-year zero-coupon bond with a face value of $2,450.83 • Purchase a 5-year zero-coupon bond with a face value of $500.0 (a) Find the present value of the liability (b) Calculate the duration of the assets and liabilities. (c) Define S=VA-V₁, calculate S when there is an immediate one-time change of interest rate from 10% to 9%,
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Immunization Strategy for the Financial Institution Given Payments 1000 after 2 years 2000 after 4 years Interest rate 10 Zerocoupon bond maturities Y... View the full answer
Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
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