Case Solution

Problems Q. 1 convey a five- course of study coupon bond with a face value of $ deoxyguanosine monophosphate paying an annual coupon of 15%. (i) If the current market soften is 8%, what is the bonds worth? (ii) If the current market give in increases by 1% what is the bonds new price? (iii) utilise your answers to part (i) and (ii) , what is percentage change in the bonds price as a result of 1% increase in involution rank. Q. 2 Consider the following FI balance cruise M. Match Ltd Assets Liabilities year treasury bond $175,000 1-year CD$135,000 15-year corporate bond$165,000 5-year deposit$160,000 Notes exclusively securities are selling at par (equal to book value). The two-year Treasury bonds yield 5% the 15-year corporate bonds yield 9% the one-year CD issue pays 4. 5% and the five-year deposit pays 8%. Assume that all instruments go for annual coupon payments. (a) What is the value of M. Match Ltds equity? (b) What is the weighted average maturity of FIs assets? (c) What is the weighted average maturity of FIs liabilities? d) What is the FIs maturity shot? (e) What does your answer to part (d) imply slightly the interest rate luck of exposure exposure of M. Match Ltd? (f) Calculate the value of all four securities on M. Match Ltds balance sheet if all interest rates increase by 2%. (g) What is the contact on the equity of M. Match Ltd? Calculate the percentage change in the value of equity. (h) What would be the impact on M. Match Ltds risk exposure if its liabilities paid semi-annually as opposed to annually? Q. An insurance participation issues a $100,000 one-year bond paying 7% annually in order to finance the acquisition of a $100,000 one-year corporate contribute paying 9 % semi-annually. (a) What is the insurance companys maturity faulting? What does the maturity model state about interest rate risk exposure given the insurance companys maturity gap? (b) Immediately after the insurance company makes these investments, all interest rates increase by 3%. What is the impact on the asset hard currency flows? What is the impact on the liability cash flows?