Case Solution

Problems Q. 1 Consider a five- category coupon bond with a face value of $1000 paying an annual coupon of 15%. (i) If the new market suffer is 8%, what is the bonds price? (ii) If the current market yield increases by 1% what is the bonds new price? (iii) Using your answers to part (i) and (ii) , what is section change in the bonds price as a result of 1% increase in interest rates. Q. 2 Consider the following FI balance sheet M. fight down Ltd Assets Liabilities year Treasury bond $175,000 1-year CD$135,000 15-year corporate bond$165,000 5-year deposit$160,000 Notes All securities are selling at par (equal to book value). The two-year Treasury bonds yield 5% the 15-year corporate bonds yield 9% the one-year CD issue pays 4. 5% and the five-year deposit pays 8%. Assume that all instruments have annual coupon payments. (a) What is the value of M. Match Ltds equity? (b) What is the weighted average maturity of FIs assets? (c) What is the weighted average maturity of FIs liabilitie s? d) What is the FIs maturity jailbreak? (e) What does your answer to part (d) imply about the interest rate risk exposure of M. Match Ltd? (f) Calculate the values of all four securities on M. Match Ltds balance sheet if all interest rates increase by 2%. (g) What is the impact on the equity of M. Match Ltd? Calculate the percentage change in the value of equity. (h) What would be the impact on M. Match Ltds risk exposure if its liabilities paid semi-annually as opposed to annually? Q. An amends company issues a $100,000 one-year bond paying 7% annually in order to finance the acquisition of a $100,000 one-year corporate bestow paying 9 % semi-annually. (a) What is the insurance companys maturity gap? What does the maturity model state about interest rate risk exposure given the insurance companys maturity gap? (b) Immediately after the insurance company makes these investments, all interest rates increase by 3%. What is the impact on the asset cash flows? What is the impact o n the liability cash flows?