Assume you have the following asset and liability in your balance sheet Asset - Bond A Modified Duration = 1.5 years Value = RM1 million Liability - Bond B Modified Duration 2.6 years Value = RM2 million a. Calculate the duration gaps? b. What is the expected change in Net worth if interest increases by 1%? c. What should or could you to achieve immunised balance sheet?

Assume you have the following asset and liability in your balance sheet Asset - Bond A Modified Duration = 1.5 years Value = RM1 million Liability - Bond B Modified Duration 2.6 years Value = RM2 million a. Calculate the duration gaps? b. What is the expected change in Net worth if interest increases by 1%? c. What should or could you to achieve immunised balance sheet?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 5MC: What would be the value of the bond described in Part d if, just after it had been issued, the...

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What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
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