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    BAF 173005 Quiz 2

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    Hamza Khaliq
    This document contains the answers to various questions about calculating duration for different financial instruments, including a five-year loan, core deposits, and a bank's overall portfolio. It determines that the bank, GBI, has a positive duration gap of 0.8942 years, meaning it is exposed to losses if interest rates increase. The summary calculates how a 1% and 0.5% interest rate change would affect the bank's equity value. It concludes GBI could reduce its duration gap by using more short-term funds or a mix of strategies.

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    BAF 173005 Quiz 2

    Uploaded by

    Hamza Khaliq
    28 views4 pages
    This document contains the answers to various questions about calculating duration for different financial instruments, including a five-year loan, core deposits, and a bank's overall portfolio. It determines that the bank, GBI, has a positive duration gap of 0.8942 years, meaning it is exposed to losses if interest rates increase. The summary calculates how a 1% and 0.5% interest rate change would affect the bank's equity value. It concludes GBI could reduce its duration gap by using more short-term funds or a mix of strategies.

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    This document contains the answers to various questions about calculating duration for different financial instruments, including a five-year loan, core deposits, and a bank's overall portfolio. It determines that the bank, GBI, has a positive duration gap of 0.8942 years, meaning it is exposed to losses if interest rates increase. The summary calculates how a 1% and 0.5% interest rate change would affect the bank's equity value. It concludes GBI could reduce its duration gap by using more short-term funds or a mix of strategies.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    28 views4 pages

    BAF 173005 Quiz 2

    Uploaded by

    Hamza Khaliq
    This document contains the answers to various questions about calculating duration for different financial instruments, including a five-year loan, core deposits, and a bank's overall portfolio. It determines that the bank, GBI, has a positive duration gap of 0.8942 years, meaning it is exposed to losses if interest rates increase. The summary calculates how a 1% and 0.5% interest rate change would affect the bank's equity value. It concludes GBI could reduce its duration gap by using more short-term funds or a mix of strategies.

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    You are on page 1of 4

    QUIZ 2

    Hasnat Khaliq
    BAF 173005

    Question 2
    Answer no (a) part
    Five-year loan
    Par value = $65
    Coupon rate = 12%
    Annual payments = 12%
    Maturity = 5 years
    1. T CF PV of CF PV of CF ×t
    1 $7.80 $6.964 $6.964
    2 $7.80 $6.218 $12.436
    3 $7.80 $5.552 $16.656
    4 $7.80 $4.957 $19.828
    5 $72.80 $41.309 $206.543
    $65.000 $262.427

    Duration = $262.427/$65.000 = 4.0373


    The duration is 4.0373 years

    ANSWER no (b) Part


    DA= [30(0) + 20(.36) + 105(.36) + 65(4.0373)]/220 = 1.3974 years

    Answer no (c) Part


    Two-year core deposits (values in $ million)Par value = $20
    Coupon rate = 8%
    Annual paymentsR = 8%
    Maturity = 2 years

    Duration = $38.519/$20.000 = 1.9259


    The duration of the core deposits is 1.9259 years

    ANSWER no (D) Part


    DL= [20 × (1.9259) + 50 × (0.401) + 130 × (0.401)]/200 = 0.5535 years
    ANSWER no (E) Part
    GBI's leveraged adjusted duration gap is: 1.3974–200/220 × (0.5535) = 0.8942
    yearsSince GBI''s duration gap is positive, it is exposed to an increase in interest
    rates.
    ANSWER no (F) Part
    Since GBI''s duration gap is positive, an increase in interest rates will lead to a
    decrease in themarket value of equity. For a 1 per cent increase, the change in
    equity value is:ΔE = –0.8942 × $220 000 000 × (0.01) =–$1 967 280 (new net
    worth will be $18 032 720).
    ANSWER no (G) Part
    Since GBI's duration gap is positive, a decrease in interest rates will lead to an
    increase inmarket value of equity. For a 0.5 per cent decrease, the change in equity
    value is:ΔE = –0.8942 × (–0.005) × $220 000 000 = $983 647 (new net worth will
    be $20 983 647).(h). Therefore, GBIcould reduce the duration of its assets to
    0.5032 (0.5535 × 200/220) years by using moreinterbank funds and floating rate
    loans. Or GBI could use a combination of reducing assetduration and increasing
    liability duration in such a manner that DGAP is 0.
    View full document

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