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% $550M (lending money) 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $800M 53.565 9.453 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) 4yr bond sold at a yield of 2.8% $500M 3.759 8.206 (borrowing money) a) 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. (Hint: equity to asset ratio = total equity/total asset) b) In a)'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?
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% $550M (lending money) 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $800M 53.565 9.453 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) 4yr bond sold at a yield of 2.8% $500M 3.759 8.206 (borrowing money) a) 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. (Hint: equity to asset ratio = total equity/total asset) b) In a)'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?
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 8P
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