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Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 4.562 Syr bond bought at a yield of 3.4% (lending money) $550M 12.026 12yr bond bought at a yield of 4% $80OM 53.565 (lending money) 9.453 Liabilities Duration of the Liability Convexity of the Liability Value 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) Calculate the equity (total asset - total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides. c) If the interest rates go up by 1%, using the durotion and convexity rule to determine the net worth of the bank and the equity to asset ratio.

Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 4.562 Syr bond bought at a yield of 3.4% (lending money) $550M 12.026 12yr bond bought at a yield of 4% $80OM 53.565 (lending money) 9.453 Liabilities Duration of the Liability Convexity of the Liability Value 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) Calculate the equity (total asset - total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides. c) If the interest rates go up by 1%, using the durotion and convexity rule to determine the net worth of the bank and the equity to asset ratio.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 4.562 Syr bond bought at a yield of 3.4% (lending money) $550M 12.026 12yr bond bought at a yield of 4% $80OM 53.565 (lending money) 9.453 Liabilities Duration of the Liability Convexity of the Liability Value 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) Calculate the equity (total asset - total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides. c) If the interest rates go up by 1%, using the durotion and convexity rule to determine the net worth of the bank and the equity to asset ratio.
Transcribed Image Text:Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 4.562 Syr bond bought at a yield of 3.4% (lending money) $550M 12.026 12yr bond bought at a yield of 4% $80OM 53.565 (lending money) 9.453 Liabilities Duration of the Liability Convexity of the Liability Value 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) Calculate the equity (total asset - total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides. c) If the interest rates go up by 1%, using the durotion and convexity rule to determine the net worth of the bank and the equity to asset ratio.
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