Suppose the following simple balance sheet in market values: Assets Liabilities and OE Deposits $90m (D=1yr)...
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Suppose the following simple balance sheet in market values: Assets Liabilities and OE Deposits $90m (D=1yr) Cash $5m (D=0) Corporate Loans $10m (D=5) Mortgages $85m (D=10) Equity $10m a) What is the duration of the assets? b) Suppose yields all increase by 1% (continuously compounded). Using the duration approximation, what will happen to the value of assets, liabilities, and equity? c) What interest rate change (assuming a parallel yield curve shift) will cause the value of equity to go to zero (use the duration approximation)? d) What is the duration of equity? e) Verify that the duration approximation applied directly to the dollar duration of equity implies that the same yield change you found in part (b) also causes the value equity to fall to zero. Suppose the following simple balance sheet in market values: Assets Liabilities and OE Deposits $90m (D=1yr) Cash $5m (D=0) Corporate Loans $10m (D=5) Mortgages $85m (D=10) Equity $10m a) What is the duration of the assets? b) Suppose yields all increase by 1% (continuously compounded). Using the duration approximation, what will happen to the value of assets, liabilities, and equity? c) What interest rate change (assuming a parallel yield curve shift) will cause the value of equity to go to zero (use the duration approximation)? d) What is the duration of equity? e) Verify that the duration approximation applied directly to the dollar duration of equity implies that the same yield change you found in part (b) also causes the value equity to fall to zero.
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a The duration of the assets is 0 b The value of the assets will increase by 1 the value ... View the full answer
Related Book For
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta
Posted Date:
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