...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 spreadsheet to answer the following questions: (a) Compute the PVBP (aka DV01) given the initial yields show above. (b) Compute Modified Duration (D*) using Equation 4.10 (c) Use the Excel “=DURATION” formula to calculate the duration for each bond. Hint: You must use date values two years apart and five years apart for “SETTLE” and “MATURITY”. (d) Does the Excel duration...
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...Chapter Twenty Four Futures and Forwards Chapter Outline Introduction Forward and Futures Contracts • Spot Contracts • Forward Contracts • Futures Contracts Forward Contracts and Hedging Interest Rate Risk Hedging Interest Rate Risk with Futures Contracts • Microhedging • Macrohedging • Routine Hedging versus Selective Hedging • Macrohedging with Futures • The Problem of Basis Risk Hedging Foreign Exchange Risk • Forwards • Futures • Estimating the Hedge Ratio Hedging Credit Risk with Futures and Forwards • Credit Forward Contracts and Credit Risk Hedging • Futures Contracts and Catastrophe Risk • Futures and Forward Policies of Regulators Summary Solutions for End-of-Chapter Questions and Problems: Chapter Twenty Four 1. What are derivative contracts? What is the value of derivative contracts to the managers of FIs? Which type of derivative contracts had the highest volume among all U.S. banks as of September 2003? Derivatives are financial assets whose value is determined by the value of some underlying asset. As such, derivative contracts are instruments that provide the opportunity to take some action at a later date based on an agreement to do so at the current time. Although the contracts differ, the price, timing, and extent of the later actions usually are agreed upon at the time the contracts are arranged. Normally the contracts depend...
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...page: http: www.stern.nyu.edu ~dbackus Contents Preface 1 Debt Instruments 1.1 Overview : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 1.2 The Instruments : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : v 1 1 2 I Instruments with Fixed Payments 2 Bond Arithmetic 2.1 Prices and Yields in the US Treasury Market : : : : : : : : : : : : : : : : : 2.2 Replication and Arbitrage : : : : : : : : : : : : : : : : : : : : : : : : : : : : 2.3 Day Counts and Accrued Interest : : : : : : : : : : : : : : : : : : : : : : : : 2.4 Other Conventions : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 2.5 Implementation Issues : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 2.6 Common Yield Fallacies : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 2.7 Forward Rates optional : : : : : : : : : : : : : : : : : : : : : : : : : : : : 8 9 9 14 17 19 23 24 26 3 Macrofoundations of Interest Rates 39 CONTENTS i 4 Quantifying Interest Rate Risk 4.1 Price and Yield : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.2 More on Duration : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.3 Immunization : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.4 Convexity optional : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.5 Fixed Income Funds : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.6 Statistical Measures of...
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...Pick the correct answer. If answers A through D are not correct or there is inadequate information, pick answer E. 1. Assume that the one-period spot interest rate is 3% and the two-period spot interest rate is 7%. What is the present value of $100 received one year from now? A. $87.34 B. $93.46 C. $96.12 D. $97.08 E. None of the above.$97.08 2. The present value of $100 received one year from now is $91.27 and the present value of $100 received two years from now is $88.76. What is the two-year spot interest-rate? A. 6.14% B. 6.18% C. 6.23% D. 6.31% E. None of the above.$84.17 3. Assume that the one-period spot interest rate is 3% and the two-period spot interest rate is 7%. You invest $100 one-year from today. What is the time 2 value? A. $110.87 B. $111.16 C. $118.81 D. $119.28 E. None of the above. 4. Assume that the three-year spot interest rate is 3% and the four-year spot interest rate is 9%. You are going to receive $120 four years from now. What is the time 3 value? A. $104.03 B. $104.97 C. $105.19 D. $105.44 E. None of the above.$104.03 $118.81 5. Assume that the one-period spot interest rate is 3% and the two-period spot interest...
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...* Home * Glossary * Calculators * About This Site * Site Map Advanced Search ------------------------------------------------- Top of Form Bottom of Form * Bond Markets / Prices * Commentary * Learn More * Overview * Bond Basics * What You Should Know * Buying and Selling Bonds * Types of Bonds * Strategies * Bonds at Your Stage of Life * About Municipal Bonds * About Government/Agency Bonds * About Corporate Bonds * About MBS/ABS * How to Use This Site * Links to Other Sites Learn More * Overview * Bond Basics * What You Should Know * Overview * The Role of Bonds in America * Investor's Checklist * Investor Protection * Asset Allocation * Reading Bond Prices In the Newspaper * Understanding Economic Statistics * Bond and Bond Funds * Risks of Investing in Bonds * Rating Changes and Your Investments * Corporate Bankruptcy & Your Investment * Selecting and Working with a Financial Professional * Rising Rates and Your Investments * Tax Tables * Buying and Selling Bonds * Types of Bonds * Strategies * Bonds at Your Stage of Life * About Municipal Bonds * About Government/Agency Bonds * About Corporate Bonds * About MBS/ABS * How to Use This Site * Links to Other Sites What You Should Know * Print ...
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...Answers to Practice Questions 1. Downward sloping. This is because high coupon bonds provide a greater proportion of their cash flows in the early years. In essence, a high coupon bond is a ‘shorter’ bond than a low coupon bond of the same maturity. 2. The key here is to find a combination of these two bonds (i.e., a portfolio of bonds) that has a cash flow only at t = 6. Then, knowing the price of the portfolio and the cash flow at t = 6, we can calculate the 6-year spot rate. We begin by specifying the cash flows of each bond and using these and their yields to calculate their current prices: Investment Yield C1 . . . C5 C6 Price 6% bond 12% 60 . . . 60 1,060 $753.32 10% bond 8% 100 . . . 100 1,100 $1,092.46 From the cash flows in years one through five, it is clear that the required portfolio consists of one 6% bond minus 60% of one 10% bond, i.e., we should buy the equivalent of one 6% bond and sell the equivalent of 60% of one 10% bond. This portfolio costs: $753.32 – (0.6 $1,092.46) = $97.84 The cash flow for this portfolio is equal to zero for years one through five and, for year 6, is equal to: $1,060 – (0.6 1,100) = $400 Thus: $97.84 (1 + r6)6 = 400 r6 = 0.2645 = 26.45% 3. Using the general relationship between spot and forward rates, we have: (1 + r2)2 = (1 + r1) (1 + f2) = 1.0600 1.0640 r2 = 0.0620 = 6.20% (1 + r3)3 = (1 + r2)2 (1 + f3) = (1.0620)2 1.0710 r3 = 0.0650 = 6.50% (1 + r4)4 = (1 + r3)3 (1 + f4) = (1...
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...Mortgage Rate is highly correlated to 10 year treasury rate * LIBOR * Demand of the dollar is going down because of Chinese currency. Chinese currency is getting stronger. * Right now the dollar is world reserve currency in IMF. Oil is traded for dollars only now. In the future, some other currency will be used and the demand for the dollar and the value will diminish * Fiat currency: dollar is a fiat currency * Bank issues notes for Gold * Bretton Wood agreement: dollar is backed by gold and is linked to other currency. But now no currencies is backed buy gold. * Pay day loan is available immediately with enormous interest rate. * Liquidity Risk (LRP): Something is for example liquid is when I sell shares to get cash. * Short term loan: Higher Interest rate * Long Term loan: Low interest rate * (Slide 22): See notes 1/21/2016 * Know about Dodd Frank: * Problems solved: Lack of regulations * Kept huge bank from collapsing * Risky Periptery trading * SEC office of credit rating * Problem Caused: * Hard to get Mortgage * Community banks failed * Voter ride * Reforms Needed * Have banks declare * Remove special treatments of when going into bankruptcy 1/28/2016 * Market often over reacts * When the oil prices are low recycling industry might get hurt which will make metal prizes cheaper * Duration is the weighted sum of cash flows...
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...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 measure when comparing...
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...CONTENTS BONDS 1 STOCKS 6 OPTIONS 10 FUTURES 16 PORTFOLIO PERFORMANCE EVALUATION 20 INTERNATIONAL INVESTING 26 BONDS Page 480 –CFA Problems Questions #1 1. Leaf Products may issue a 10-year maturity fixed-income security, which might include a sinking fund provision and either refunding or call protection. a) Describe a sinking fund provision. The sinking fund provision allows the firm to repurchase a fraction of the outstanding bonds at either the market price or the sinking fund price (usually set at par), depending on the structure of the provision. The provision may be for a specific number of bonds or a percentage of the bond issue. The bonds selected for repurchase are generally selected at random. b) Explain the impact of a sinking fund provision on: i. The expected average life of the proposed security. We would expect a fraction of the total bond issue to be retired before the stated maturity data under the sinking fund provision. Therefore, the sinking fund provision decreases the expected average life of the proposed security. ii. Total principal and interest payments over the life of the proposed security. The sinking fund provision does not affect the total principal payments that investors would receive. However, investors may receive their principal repayments earlier than expected if the firm invokes the sinking fund provision. The sinking fund provision could decrease the amount of interest payments investors would receive...
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...Homework Assignment – Week 2 Chapter 3 1. Write down the formula that is used to calculate the yield to maturity on a 20-year 10% coupon bond with $1,000 face value that sells for $2,000. Assume yearly coupons. $2000 $100/(1 i) $100/(1 i)2 $100/(1 i)20 $1000/(1 i)20 2. If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk? You would rather be holding long-term bonds because their price would increase more than the price of the short-term bonds, giving them a higher return. 3. A financial advisor has just given you the following advice: “Long-term bonds are a great investment because their interest rate is over 20%.” Is the financial advisor necessarily correct? No. If interest rates rise sharply in the future, long-term bonds may suffer such a sharp fall in price that their return might be quite low, possibly even negative. 4. If mortgage rates rise from 5% to 10%, but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses? People are more likely to buy houses because the real interest rate when purchasing a house has fallen from 3 percent (5 percent –2 percent) to 1 percent (10 percent 9 percent). The real cost of financing the house is thus lower, even though mortgage rates have risen. (If the tax deductibility of interest payments is allowed for, then...
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...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 as well as detrimental to the total economic health of the FI. 6. Consider three Treasury bonds each of which has a 10 percent semiannual coupon and trades at par. a. Calculate the duration for a bond that has a maturity of four years, three years, and two years? Four-year Treasury Bond: Par value = $1,000 Coupon rate = 10% Semiannual payments R = 10% CF t 0.5 $50 1 $50 1.5 $50 2 $50 2.5...
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...Executive Summary Liquidity management refers to meeting liquidity needs by using the outside sources of discretionary funds like government funds, discount window borrowings, repurchase agreements, certificates of deposits and other types of commercial borrowings. The major risk a bank runs is liquidity risk. Under any circumstances a bank has to honor its commitments. As a result, it has to make sure that enough liquidity is available to meet fund requirements in situations like liquidity crisis in the market, policy changes by central bank, a name problem of the bank etc. So, a bank’s balance sheet should have enough liquid assets for meeting contingencies. Here, I can introduce with the theoretical development of asset liability management from the different aspects of The City Bank Limited. Then I can show their policy and statements regarding to the managing their assets liabilities and then I have shown their liquidity analysis through the external analysis to assess their recent market condition. The whole analysis part is undergone from 2004 to 2008. In this analysis part I have analyzed different ratio related to liquidity management so that liquidity position of CBL can easily be assessed. Then I have shown the maturity model from 2004 to 2008. In this analysis CBL’s weighted average assets and liabilities are compared. Here we can see that except 2004 the bank’s assets’ weighted average maturity always higher than its weighted average liabilities’ maturity. Then...
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...J.P. Morgan Asset Management Long-term Capital Market Return Assumptions 2012 Edition For institutional an d proFEssional invEstor usE only | not For rEtail usE or distribution J.P. Morgan Asset Management Long-term Capital Market Return Assumptions Expected 10–15 year annualized compound returns (%)1,2 u.s. Economic indicators Inflation Core Inflation Real GDP U.S. Cash U.S. Intermediate Treasury3 U.S. Long Treasury4 U.S. TIPS U.S. Aggregate U.S. Short Duration Gov’t/Credit U.S. Long Duration Gov’t/Credit U.S. Investment Grade Corporate U.S. Long Corporate U.S. High Yield U.S. Leveraged Loan World Government Bond (local) World ex-U.S. Government Bond (local) World ex-U.S. Government Bond Emerging Market Sovereign Debt Emerging Market Local Currency Sovereign Debt Emerging Market Corporate Debt U.S. Municipal U.S. Large Cap U.S. Large Cap EPS Growth U.S. Large Cap Dividend Yield U.S. Large Cap P/E Return Impact U.S. Mid Cap U.S. Small Cap U.S. Large Cap Value U.S. Large Cap Growth Europe ex-U.K. Large Cap (local) Japan Large Cap (local) U.K. Large Cap (local) EAFE Equity (local) EAFE Equity Emerging Market Equity Asia ex-Japan Equity Global Equity U.S. Private Equity5,6 U.S. Direct Real Estate (unlevered)5,6 U.S. Value Added Real Estate (unlevered)5,6 European Real Estate (unlevered, local)5,6 U.S. REITs Global Infrastructure5,6 Hedge Fund—Diversified5,6 Hedge Fund—Event Driven5,6 Hedge Fund—Long Bias5,6 Hedge Fund—Relative Value5,6 Hedge Fund—Macro5,6 Commodities...
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...ACCT-346 Quizzes and Exams http://uphomework.com/downloads/acct-346-quizzes-exams/ ACCT/346 All Quizzes and Exams Solved – A Grade Guaranteed ACCT346 Test Bank All Quizzes + Midterm Exam + Final Exam Chapter 1- 20 CHAPTER 1 TRUE/FALSE QUESTIONS 1. The purpose of the financial system is to bring savers and borrowers together. 2. Businesses are never DSUs. 3. A financial claim is an “IOU” from a deficit spending unit. 4. Investment bankers help DSUs bring new primary security issues to market. 5. Deposits in a credit union by a household are an example of direct finance. 6. When an SSU owns a financial claim created by financial intermediation, its residual claim is against a DSU. 7. Assets of financial intermediaries include direct financial claims only. 8. Finance companies take small consumer deposits and make large consumer loans. 9. Liabilities of financial intermediaries are indirect financial claims. 10. Direct finance requires a more or less exact match of preferences. 11. There must be an equal number of DSUs and SSUs in a period. 12. Every financial claim appears on two balance sheets. 13. Without a financial sector, real investment must be financed internally by the DSU. 14. Depository intermediaries issue claims that are for the most part highly liquid. 15. A household is an SSU when income for the period exceeds spending. 16. An SSU must hold a claim until its scheduled maturity. 17. Financial claims or securities are written for the mutual...
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...4.1 Measuring Interest Rates 1) The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) present value B) future value C) interest D) deflation Answer: A Ques Status: Previous Edition 2) The present value of an expected future payment ________ as the interest rate increases. A) falls B) rises C) is constant D) is unaffected Answer: A Ques Status: Previous Edition AACSB: Reflective thinking skills 3) An increase in the time to the promised future payment ________ the present value of the payment. A) decreases B) increases C) has no effect on D) is irrelevant to Answer: A Ques Status: Previous Edition AACSB: Reflective thinking skills 4) With an interest rate of 6 percent, the present value of $100 next year is approximately A) $106. B) $100. C) $94. D) $92. Answer: C Ques Status: Previous Edition AACSB: Analytic skills 5) What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500.00 C) $476.25 D) $550.00 Answer: A Ques Status: New AACSB: Analytic skills 6) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent. Answer: B Ques Status: Previous Edition AACSB: Analytic skills 7) To claim that a lottery winner who is to receive $1 million per...
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