...Interest Rate Risk Dr HK Pradhan XLRI Jamshedpur Hull Ch 7 Fabozzi chapters on duration & Convexity, Ch-7, Convexity Stochastic Process notes Session Objectives j Valuation of fixed income securities Risks in fixed income securities Traditional measures of risk – (we know PVBP, duration and convexity, M-Square) M Square) VaR based risk measures Interest rate volatility calculations Portfolio risk & Cash flows mapping issues Var for Interest Rate Derivatives Interest rate risk and Bond portfolio management Profile of Interest Rate Markets, Instruments & Institutions Bond Price P 1 y C1 1 1 y C2 2 1 y Ct C3 3 1 y n Cn price Sum of the present values of each cashflows p P n t 1 1 y t M 1 y n yield price < par (discount bond) price = par (par bond) price > par (premium bond) Concept of Accrued Interest p When you buy a bond between coupon dates, you pay the seller: Clean Price plus the Accrued Interest – pro-rated share of the fi coupon: i d h f h first interest d does not compound b d between coupon payment dates. LD Days Accrued Interest Total T from last Coupon between Coupon Date Dates Days ND (Coupon) Dirty Price Clean price Accrued Interest Accrued Interest Face * C T LD * 2 ND LD Bond Valuation Value of a bond is the present value of future cashflows, so...
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...California Debt and Investment Advisory Commission Duration Basics Introduction Duration is a term used by fixed-income investors, financial advisors, and investment advisors. It is an important measure for investors to consider, as bonds with higher durations (given equal credit, inflation and reinvestment risk) may have greater price volatility than bonds with lower durations. It is an important tool in structuring and managing a fixed-income portfolio based on selected investment objectives. Investment theory tells us that the value of a fixed-income investment is the sum of all of its cash flows discounted at an interest rate that reflects the inherent investment risk. In addition, due to the time value of money, it assumes that cash flows returned earlier are worth more than cash flows returned later. In its most basic form, duration measures the weighted average of the present value of the cash flows of a fixed-income investment. All of the components of a bond—price, coupon, maturity, and interest rates—are used in the calculation of its duration. Although a bond’s price is dependent on many variables apart from duration, duration can be used to determine how the bond’s price may react to changes in interest rates. This issue brief will provide the following information: < A basic overview of bond math and the components of a bond that will affect its volatility. < The different types of duration and how they are calculated. < Why duration is an important...
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...行、农业银行、上海银行、太平洋保险、平安证券、富国基金等。 主编出版：《固定收益证券定价理论》、《财务报表分析技术》、《公司财务》、《衍生产品定 价理论》、《商业银行管理学》多本金融教材，备受金融学习者与从业人员好评。 新浪微博：汤震宇CFA_金程教育 联系方式： 电话：021－33926711 2-156 邮箱：training@gfedu.net 100% Contribution Breeds Professionalism 前导课程大纲 CFA一级框架结构 金 金程服务平台及百题分析报告 务 台 析 计算器使用 财务前导 3-156 100% Contribution Breeds Professionalism CFA 考试知识点及其比重 TOPIC AREA LEVELⅠ LEVELⅡ LEVEL Ⅲ Ethical and Professional Standards (total) 15 10 10 Quantitative Methods 12 5-10 0 Economics 10 5-10 0 Financial St t Fi i l Statement A l i t Analysis 20 15-25 15 25 0 Corporate Finance 8 5-15 0 Investment Tools (total) 50 30 60 30-60 0 Analysis of Equity Investments 10 20-30 5--15 Analysis of Fixed Income Investments 12 5-15 10--20 Analysis of Derivatives 5 5-15 5--15 Analysis of Alternative Investments 3 5-15 5--15 Asset Valuation (total) 30 35-75 35--45 Portfolio Management (total) 5 5-15 45--55 100 100 100 TOTAL 4-156 100% Contribution Breeds Professionalism 知识框架分析——Ethics 知识框架分析——Ethics Code of Ethics Integrity g y Credit ...
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...Chapter 4 – Bond Price Volatility Extra Questions 1. Be sure you understand all the relationships shown in Exhibit 4-11 2. The price of a bond can be written as either as the sum of series of discounted CFs (Equation 4.1, page 63) or as the sum of the PV of an annuity and the discounted maturity value (Equation 4.9, page 67). Note that the PV of an annuity formula used in Equation 4.9 is derived from the difference between a perpetuity starting at time zero and a perpetuity starting at time n. The difference is an annuity starting at time 0 and ending at time n. Equation 4.3 is the first derivative of price w.r.t. yield (∂P/∂y) using equation 4.1. The numerator of equation 4.10 is first derivative of the price w.r.t. yield using equation 4.9. Consider either equation 4.3 or the numerator of 4.9. Determine only the sign of following second derivative and mixed partial derivatives: * ∂2P/∂y2 * ∂2P/∂y∂C * ∂2P/∂y∂n (a) Does duration increase or decrease as the initial yield increases?(decrease) (b) Does duration increase or decrease as the coupon increases?(decrease) (c) Does duration increase or decrease as the maturity increases?(increase) 3. (This is questions 2 and 4 from the text.) Consider semi-annual bonds A and B. | Bond A | Bond B | Coupon | 8% | 9% | Yield to maturity | 8% | 8% | Maturity (years) | 2 | 5 | Par | $100.00 | $100.00 | Price | $100.00 | $104.055 | Produce an Excel...
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...Chapter 09 - Interest Rate Risk II Chapter Nine Interest Rate Risk II Chapter Outline Solutions for End-of-Chapter Questions and Problems 1. What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the two methods? What is marking to market? Book value accounting reports assets and liabilities at the original issue values. Market value accounting reports assets and liabilities at their current market values. Current market values may be different from book values because they reflect current market conditions, such as current interest rates. FIs generally report their balance sheets using book value accounting methods. This is a problem if an asset or liability has to be liquidated immediately. If the asset or liability is held until maturity, then the reporting of book values does not pose a problem. For an FI, a major factor affecting asset and liability values is interest rate changes. If interest rates increase, the value of both loans (assets) and deposits and debt (liabilities) fall. If assets and liabilities are held until maturity, it does not affect the book valuation of the FI. However, if deposits or loans have to be refinanced, then market value accounting presents a better picture of the condition of the FI. The process by which changes in the economic value of assets and liabilities are accounted is called marking to market. The changes can be beneficial...
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...Bond Valuation By Anuj Joshi Note 1 Bond Valuation Fixed income paying securities. 1. Theoretical price or value of bond depends upon. i. Coupon Payment : Fixed amount of interest to be received after prescribed frequency. ii. Maturity Value [Unless otherwise given is exam, we should take face value] iii. Discount Rate : It should always be market interest rate 2. What is market interest rate Market interest rate is derived from comparable listed bond. The comparison is based on risk and life of the bond. E.g. If we are valuing a bond which is unlisted and have 5 years of life, then we should look for a bond which is similar in risk profile (i.e. same credit rating)and having similar life. The YTM (Yield to Maturity) of listed bond is called market interest rate The YTM of a bond is nothing but IRR of the bond. 3. Value of a bond = PV of Coupon Amount + PV of Maturity Value [Remember CF and discount rate are before tax] Concept Point: i. Coupon rate is a historical rate and should never be used as a discount rate. In exam, if no other information is available, then only we should assume coupon rate of interest as market rate of interest. ii. Remember, Cost of Capital or Discount Rate is a future concept and it represents opportunity cost on the date of valuation. iii. YTM of a similar bond (i.e. current market interest rate) is the appropriate discount rate for bond valuation. How to value a bond which pays interest at a frequency lower than annually (e...
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...Introduction In this assignment, I will evaluate the reliability of break-even analysis in estimating budgeted activity levels for a selected organisation. Break – Even Analysis Break even analysis is reliable as it is made from the budget and it gives a financial structure to the business. The data used for break-even, the business try to make the data as accurate as possible. They make this data depending on the previous year’s financial report. That’s why break-even is reliable to estimate current year’s results. In a short run, break-even analysis can be accurate. There are some limitations of break-even as well. For example, it cannot give accurate results if the data used for it is predicted. Data such as change in direct cost or indirect cost can have an impact on break-even analysis. This means that the results are going to be very different from the actual result. So, in the long run break even will not be reliable. Furthermore, if the company is selling more than one product, it will become really hard for the company to carry out break-even analysis. This is because; all the different products are going to have different prices meaning that the company will have to create different financial accounts for each product they sell. The break-even analysis has to be different for each one as well. Also, a change in the selling price is going to have huge effect on break-even analysis. If the selling price changes, the whole financial data will change as well. If the...
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...i) Assume an immediate and sustained 1 percent across-the-board rise in interest rates. Based on a review of Exhibit 3, discuss how one would use interest rate-sensitivity gap information to estimate the impact of rising interest rates on the earning of Norwest Corporation. Interest rate-sensitivity gap information serves as a preparatory tool for Norwest Corporation to estimate the impact of rising interest rates on their earnings. It is most popular interest rate hedging strategy use in today which is require management to perform an analysis of the maturities and repricing opportunities associated with interest-bearing assets and deposits and other borrowings. Periodic GAP is compares interest sensitive assets with interest sensitive liabilities across each of the different time bucket and in a measure of the timing of changes in interest rates on net interest income. The Gap of the corporation is mostly positive for all the time periods except for the investments that are of less than six month maturity. A Positive GAP such as in the 6 months-1 year through 5 years shown that Norwest Corporation has more interest sensitive assets than interest sensitive liabilities. When interest rate rise of 1 percent during the time interval, this holding company’s net interest margin will increase because the interest revenue generated by assets will increase more than cost of borrowed funds. In contrast, a negative GAP such as shown in Exhibit 3 the period within 6 months indicates...
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...Associate Program Material Appendix J Reliable Sources Worksheet Locate two sources in the University Library on a topic of your choice. Provide the required information for both sources. Source 1 • Author: Milgrom P,Sutherland M,Shirtcliff RM,Ludwig S,Smolen D • Date: 2010 Feb 18 • Title: Children's tooth decay in a public health program to encourage low-income pregnant women to utilize dental care. • Publication: BMC Public health Write a 100- to 150-word response to each of the following questions: • Is the source reliable? How do you know? Yes, the source is reliable as the authors are established authors. They have published the journal after conducting a survey of low income pregnant women in Klamath County, Oregon. They also conducted camps where women from low income groups were given free and regular dental check up so as to prevent the transmission of infectious bacteria from mother to the infant. This is also conducted at other counties, and a statistical analysis of the research and test conducted were studied. The results showed that children of mother in Klamath County were 1.5 times more likely to caries free than the children of mothers of other counties. • Is the information relevant to the topic? Yes, the information is very much relevant to the topic. The tests conducted and the graphs produced from statistical analysis show the results as positive. • Does the information reflect a bias on the author’s part? If...
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...Annual Report Analysis Gina Tovar The Legal Environment March 3, 2016 Table of contents Introduction…………………………………………………………………………………………………..……3 Auditor…………………………………………………………………………………………….…………….3-4 Subsequent Events, Errors and Irregularities, Illegal Acts, or Related-party Transactions…………………………………………………………………….....................................................4 Trend Analysis: Assets and Liabilities…………………………………..………….……………...…………...5-6 Largest Assets…………………………………………………………………......................................................6 Largest Liabilities…………………………………………………………………………………………………7 Stocks……………………………………………………………………………………………………………7-8 Income Statement-Multiple Step and Single Step………………………….……………………………………..8 Separately Reported Items………………………………………………………………………………………...9 Trend Analysis-Net Income……………………………………………………………………………………….9 Other Comprehensive Income………………………………………………………………………………....9-10 Cash Flow Statement………………………………………………………………………………………….....10 Cash Operations Trend Analysis…………………………………………………………………………….….11 Largest Investing Activities……………………………………………………………………………………...11 Conclusion……………………………………………………………………………………………………….12 References………………………………………………………………………………………………………13 Introduction My favorite place to go shopping is Ross, you can find pretty much everything that a household needs in one store and there is a variety of things to look over. My love for this store is the reason I chose to do my analysis on Ross’s annual report. Ross has been...
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...Linear Regression Analysis Aarian Charania Professor Habibullah Section: 8am Introduction The independent research company Consumer Research, Inc. conducted research and collected data of annual income and household size, and annual credit card charges. In this report I plan find how much our independent variables (household size and income) affects our dependent variable annual credit card charges. By using descriptive statistics such as mean and standard deviation in order to look at each variable separately. After I will use linear regression to compare two or three variables and see how each variable affects one another. In the end I plan to decide which variable is the most effective in predicting annual credit charges. As the research is limited throughout the report suggestions for improvement such as implementation of new independent variables will be included. This will hopefully lead to a improvement in the model which we already have created by using the data given. Questions For all three data sets the data is spread significantly. This is due to standard deviation being a huge percentage of the mean. In relation to skewness, all three have different distributions; for example the income data is uniformly distributed. However the household size data is skewed to the right, this means that the mean is greater than its median. The amount charged seems to be normally distributed. Amount charged has the greatest mean and household size has the smallest. (All...
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...Variables The goal of this study is to conduct a pizza demand analysis to determine the viability of opening a Domino’s Pizza outlet in Philadelphia, Pennsylvania in the area of zip code 19107. The proposed demand function contains five independent variables as follows: Qd = f(Pz, Pb, Pc, I, N) where Qd is quantity demanded. This is the dependent variable we will have to estimate. Pz is the price of pizza. This is the most important variable in determining the quantity demanded of pizza. By the law of demand, we expect it to have a negative relationship with Qd. Pb is the price of burgers, which are a substitute good to pizza. It is an important part of the equation, because as prices change, people tend to shift consumption to the relatively cheaper substitute good. Pc is the price of soda. As a close complement to pizza, a difference in the price of soda is likely to have an effect on the consumption of pizzas. I is the income level, as measured by annual salary. It measures the ability of consumers to afford pizza. Annual income data is taken from Bureau of Labor Statistics. N is the population size. Its importance for demand is clear as a higher population means a higher potential customer base. Data is taken from the US Census Bureau. For our particular zip code area of interest, Pz is $8, Pb is $6, Pc is $2, I is 25,000 and N is 12,122. Regression Analysis To construct a credible regression analysis based on the formula previously mentioned, we need a good number...
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...Chapter 2 Financial Reporting and Analysis REVIEW Financial statements are the most visible products of a company’s financial reporting process. The financial reporting process is governed by accounting rules and standards, managerial incentives, and enforcement and monitoring mechanisms. It is important for a user of financial information to understand the financial reporting environment along with the accounting information presented in financial statements. In this chapter, the concepts underlying financial reporting are discussed with special emphasis on accounting rules. Next the purpose of financial reporting is discussed – its objectives and how these objectives determine both the quality of the accounting information and the principles that underlie the accounting rules. The relevance of accounting information for business analysis and valuation is also discussed and limitations of accounting information are identified. Last, accrual accounting is discussed including the strengths and limitation of accruals, and the implications of accruals for financial statement analysis. OUTLINE | | |Financial Reporting Environment | |Statutory Financial Reports ...
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...To define accounting, is the process to identify measure and communicate economic information for the users of the information to come up with an informed judgement. (Association, n.d.). Standing the test of time, this definition defined the very purpose of accounting, which is to provide information to decision makers. As stated by this definition, accounting itself, is a process by which, financial reports are to be provided for the use of decision makers. Actually, Accounting is an information system wherein the key product of which is a set of financial reports. – The document that reports financial information about an entity to decision makers. Personal Planning, education, expenses, loans and payments, income taxes all use this information system that is accounting, (Conrado T. Valix, 2007) Having been defined as such, it is governed by rules and regulations, ensuring that it will provide a quality financial report enabling its decision makers to create intelligent decisions, these rules and regulations are defined Conceptual Framework – the professional and regulatory framework accounting that are concepts used in the preparation and presentation of financial reports. It covers the Concepts of Capital and Capital Maintenance, the Objective of Financial Statements, the Qualitative Characteristics of the Financial reports , (focusing on the manner of the report’s presentation and content) – or the qualities or attributes that make the reports useful to the users, and...
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...prior periods. ❑ Are prior trends continuing? ❑ Are new trends developing? ❑ Have changes not occurred where you expect to find them? ❑ The text (p. 374) discusses two ways to develop expectations, simple trend analysis and regression analysis. Budgeted amounts and anticipated results ❑ The variance, or lack of variance, may warrant further investigation. Relationships among elements of financial information within the period ❑ Ratios can be based on ❑ Two income statement accounts ❑ Two balance sheet accounts ❑ A balance sheet and income statement account. ❑ The auditor may also consider several accounts using common size statements. Similar information regarding the entity's industry. ❑ Due to your experience, you will develop "rules of thumb" ❑ e.g., in banking ❑ net income / total assets = ~1% ❑ total loans / total assets = ~ 60% ❑ The text also discusses other sources of industry information, such as Dun and Bradstreet or Robert Morris Associates. Relationships of financial information to operating data or other relevant nonfinancial information. ❑ For example, hotel rental income = number of rooms * average room rate * occupancy percentage. ❑ Other examples are given on p. 381, "Reasonable Tests". Use of Analytical Procedures Audit Planning ❑ Highlights ❑ Unusual or unexpected balances...
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