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FinanceQ&A LibraryConsider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $800M 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% (borrowing money) $300M 1.941 2.384 4yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206 If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?Start your trial now! First week only $4.99!*arrow_forward*

Question

Consider a bank with the following balance sheet (M means million):

Assets Value Duration of the Asset Convexity of the Asset

5yr bond bought at a yield of 3.4% (lending money) $550M 4.562

12.026

12yr bond bought at a yield of 4% (lending money) $800M 9.453

53.565

Liabilities Value Duration of the Liability Convexity of the Liability

2yr bond sold at a yield of 2.4% (borrowing money) $300M 1.941 2.384

4yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206

- If the interest rates go up by 1%, using
*the duration and convexity rule*to determine the net worth of the bank and the equity to asset ratio - In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?

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