(a) Bank Alpha, the safest credit rating, has 9-year zero-coupon bonds with a face value of $60 million. The bonds are currently yielding 5.50 per cent in the over-the-counter market.

(i) What is the price volatility if the potential adverse move in yields is 16 basis points?

(ii) What is the daily earnings at risk?

(iii) The price volatility is based on a 95 percent confidence limit and a mean historical change in daily yields of 0.0 per cent, what is the implied standard deviation of daily yield changes? (3 marks)

(iv) What would be the Value at risk (VAR) for the bond for a 10-day period? Why is the VAR for 10-day period 10 times (or not) as much as for DEAR?

(b) Which approach is claimed to address the primary disadvantage of confidence level contained in the number of days over the analysis performed by the historic simulation approach? Explain how it works.