Consider an asset with a current market value of $300,000 and a duration of 3.8 years. Assume

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Consider an asset with a current market value of $300,000 and a duration of 3.8 years. Assume the asset is partially funded through zero-coupon bonds which currently sells for $250,000 and has a maturity of 4.2 years. The current discount rate is 8% and interest rates are expected to decrease by 120 basis points.

REQUIRED

(1) Calculate the change in the net worth. Round up to 2 decimal places. Show full workings.

(2) What should the duration of liability be to fully immunise the balance sheet? Show full workings.

(3) List one problem of using duration model to manage interest rate risk. Briefly explain.

Related Book For answer-question

Corporate Finance

ISBN: 978-0133097894

3rd edition

Authors: Jonathan Berk and Peter DeMarzo

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Posted Date: Apr 19, 2023 04:04 AM

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Consider an asset with a current market value of $300,000 and a duration of 3.8 years. Assume

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Expert Answer:

1 To calculate the change in net worth we need to calculate the initial market value of the liabilities and the asset and then calculate the new marke... View the full answer

Corporate Finance

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