Be sure to scroll down to see all of the information on this sheet . ASSETS LIABILITIES 5 S Cash and due from other institutions 2, 590 Current accounts Trading securities Interest- bearing 5, 970 Commercial Paper 2, 290 Non - interest bearing 7 , 950 Bank Bills 4 , 730 savings accounts 10, 690 Treasury Notes 5, 060 Investment savings accounts#*#* 3, 940 12, 080 Fixed deposits ( long-term ) 4, 770 Investment securities Certificates of Deposit ( long-term ) 5 , 3:30 Corporate Bonds* 5, 460 Subordinated debt 15 , 140 Treasury Bonds* 7 , 100 Total liabilities 53 , 790 12 , 560 Loans Commercial loans* 5, 930 SHAREHOLDERS' EQUITY Consumer loans* * 7.950 Ordinary shares 17, 040 Mortgage loans* 6 , 290 Preference Shares 3 , 720 Total loans 21 , 170 Retained profits 7, 530 Exchange Settlement Accounts 2, 350 Asset Revaluation Reserve 4 , 170 Fixed assets & Other assets 35, 500 Total shareholders' equity 32, 460 Total Assets 86 , 250 Total liabilities and shareholders' equity 86 , 250 * The corporate bonds pay a semi - annual coupon at the rate of 5. 9% p. a . and mature on 21 - Oct - 2019. They each have a face value of $200 . They have all been issued by companies with a credit rating of AA . * The Treasury bonds mature on 21 - Apr - 2037 .` * * The mortgage loans have an average term to maturity of 4. 3 years and are at variable interest rates . All other loans ( assets or liabilities ) are at fixed interest rates . *#* The Investment Savings Accounts are at call . The following table shows the duration of Brisbane's assets and liabilities ( except that the table does not need to show corporate and Treasury bonds , non-interest rate sensitive assets and assets and liabilities with durations of zero ) ASSETS Duration ( years ) LIABILITIES Duration ( years ) Commercial Paper 0 . 50 Fixed deposits ( long-term ) 4. 40 Bank Bills\\ 0. 50 Certificates of Deposit 6. 00 Treasury Notes 0 . 10 Subordinated debt 14.30 Commercial loans 8.50 Consumer loans 4. 30FIN ZBFI - BANKING AND FINANCIAL INSTITUTIONS - ASSIGNMENT PART 1 - INTEREST RATE AND DERIVATIVES DATA Follow the instructions below to locate interest rate data and derivatives data that you will need for your Assignment . Unless everyone in the team reads every word on this page carefully you will make mistakes in later parts of the Assignment . When do the Treasury bonds mature ? BOX A 21 / 4 / 37 On what date was a coupon payment last made ? BOX B You will determine the value and duration of the Treasury bonds as at this date Find the credit spread on the bank's corporate bonds When do the corporate bonds mature ? BOX C 21 / 10 / 19 On what date was a coupon payment last made ? BOX D You will determine the value and duration of the corporate bonds as at this date How many years are there between the dates in Boxes Cand D ? ( If this is a fraction , round up to the nearest whole number of years . ) BOX E \\years ( Note : The value in BOX E Will ONLY be used to determine the credit spread on the corporate bonds ( Box F below ) . We need a whole number of years to find the credit spread . But when you calculate the price and duration of the corporate bond in Part 5 you need to work out the number of future coupon payments based on the actual time to maturity of the bonds - not necessary using the value in BOX E . You need to determine the yield on the bank's corporate bonds , and to do this you need to find the credit spread for bonds of that maturity and with Brisbane's credit rating . Download the file " Corporate Bond Spreads" from the Assignment section of the LMS . Credit spreads are expressed in basis points , where a basis point is 0 . 01% . A credit spread is the amount we need to add to the risk - free rate to Find the yield on a bond with a given credit rating ( or debt rating ) . You need to add the credit spread in Box F to the relevant Australian risk - free rate ( which you will enter in Box G below ) to get the yield on the corporate bonds . Determine the credit spread for the corporate bonds and enter this value ( in basis points ) in Box F below Credit spread for Brisbane's bonds BOX F bp Find the yield on Brisbane's corporate and Treasury bonds .Find the yield on Brisbane's corporate and Treasury bonds Go to the Reserve Bank of Australia website :" www. rba. gov . all Click on " Statistics " near the top of the page , and then , under the subheading " Economic and Financial Statistics ", click on " Interest Rates "\\ ( Depending on your browser , you may then have to scroll up until you see the Interest Rates section . ) Click on the ' XLS " link to open the spreadsheet containing " Indicative Mid Rates of Australian Government Securities - F16 " . This spreadsheet contains daily yield data for Australian Treasury bonds on issue on a given date . Row 3 contains the maturity date and the coupon rate of each bond . Search along Row 3 to find the column containing the bonds that mature on the same day as Brisbane's corporate and Treasury bonds . Then go down that column to find the last value in the columns . The values you see at the bottom of each column are the current yields on these bonds - as at the date in Column A . The date in Column A , at the start of that row , is the most recent date ( the date closest to today ) for which yields are available . Enter the yields in Boxes G & 1 below ( as percentages ) . In other words , if the yield is 2. 225% , just enter 2 . 225 . Do not enter 2 . 225% or 0 . 0225 . These instructions apply to ALL percentage values in this Assignment . Yield on Treasury bonds maturing on the same day as the corporate bonds - BOX G Yield on Brisbane's corporate bonds BOX H 4/0 Yield on Brisbane's Treasury bonds BOX/ In Box J , enter the applicable date for the yields that you have obtained ( the date at the bottom of Column A of the spreadsheet , which is on the same row as the yields you have BOXJ entered in Boxes G and !) . Find the latest Bank Bill Swap Rates . Go to the Australian Securities Exchange website :` www . as x . com . all Click on " Prices and Research " , then " Prices " from the drop- down menu , and then " ASX Benchmark Rates" . In the boxes to the right , enter the mid rates for the 3 - month , 4 - BOX K 3 - month month , 5 - month and 6 - month swap rates . BOXL 4 - month BOX M 5 - month BOX N 6 - month Find the latest prices for 3 - year and 10 - year ASX Treasury Bond futures contracts . From the same Prices menu on the ASX website , click on " ASX Futures". Scroll down to " Interest Rate Derivatives " . Look up the most recently traded price for 3 - year and 10 - year Treasury Bond futures 3 - year contract . If there are two or more futures contracts listed , use the price for the contract BOX O maturing first . BOX P 10 - yearPART 2 - DURATION In this part, round all answers to FOUR decimal places. What is the price of each of Brisbane's corporate bonds? (Calculate the price based on the current yield for the corporate bonds, but as at the date the most recent coupon payment was made prior to today's date - the date in Box D in Part 1. For example, if the yield on these bonds is currently 2.5%, and the last coupon payment was on 21 March 2016, what would the price have been on 21 March at a yield of 2.5% pa?) What is the duration of Brisbane's corporate bonds? What is the price of each of Brisbane's Treasury bonds? (Assume a face value for each bond of $100. Calculate the price in the same manner as described above - based on the current yield, but as at the last date a coupon payment was made prior to today's date - the date on Box B in Part 1.) what is the duration of Brisbane's Treasury bonds? if the yield on the corporate bonds were to decrease by 1 basis point: (a) Recalculate the price of the corporate bonds. (b) What is the actual change in price of the corporate bonds for a 1 basis point decrease in yield (i.e. the percentage change in price between Boxes Box (1 and Box U)? (Include a negative sign if the value is negative.) (c) What is the estimated change in price of the corporate bonds (based on duration) for a 1 basis point decrease in yield ? (include a negative sign if the value is negative.) (d) Compare the actual and estimated changes in price (the values in Boxes Box V and Box W). What would Box X 6. If the yield on the Treasury bonds were to decrease by 1 basis point: (a) Recalculate the price of the Treasury bonds. Box Y (b) What is the actual change in price of the Treasury bonds for a 1 basis point decrease in yield (i.e. the Box Z percentage change in price between Boxes Box S and Box Y)? (Include a negative sign if the value is negative.) (c) What is the estimated change in price of the Treasury bonds (based on duration) for a 1 basis point decrease in yield ? (Include a negative sign if the value is negative.) Box AA % (d) Compare the actual changes in price for bonds with short and long durations (the values in Boxes Box V and Box Z). What would you conclude from this about the interest-rate sensitivity of bonds based on their duration? Box AB 7. If the yield on the Treasury bonds were to decrease by 1%: (a) Recalculate the price of the Treasury bonds. Box AC $ (b) What is the actual change in price of the Treasury bonds for a 1% decrease in yield (i.e. the percentage % change in price between Boxes Box S and Box AC)? (Include a negative sign if the value is negative.) Box AD (c) What is the estimated change in price of the Treasury bonds (based on duration) for a 1% decrease in yield? (Include a negative sign if the value is negative.) Box AE % (d) Compare the differences between the actual and estimated changes in price for small and large changes in yield (i.e. compare the values in Boxes Box Z and Box AA and the values in Boxes Box AD and Box AE). What would you conclude from this about the usefulness of duration in estimating the change in the price of a bond for large changes in yield? Why is this the case? Box AFPART 3 - INTEREST RATE RISK In this part, round all answers to TWO decimal places. 8. What is the weighted average duration of Brisbane's assets (round to 2 decimal places)? Box AG years 9. What is the weighted average duration of Brisbane's liabilities (round to 2 decimal places)? Box AH years 10. What is Brisbane's duration gap (round to 2 decimal places)? Box Al years 11. What will be the estimated change in Brisbane's equity resulting from a 1 basis point increase in interest rates? Box AJ (Use the yield on the bank's Treasury bonds as the starting interest rate in the calculation. Include the correct sign.) 12. Based on your answer to Question 11, what change in interest rates - an increase or a decrease - is something that Brisbane would be disadvantaged by? Explain why. (You will develop risk management strategies in Part 4 based on your answer to this question.) Box AKFIN2BFI - BANKING AND FINANCIAL INSTITUTIONS - ASSIGNMENT PART 4 - INTEREST RATE RISK MANAGEMENT Based on your answer to Question 12, you are to design interest rate risk management strategies using the following derivatives. FORWARD RATE AGREEMENTS You decide the bank should enter into a 6 x 10 FRA, based on the appropriate BBSW (given the borrowing period implied by the FRA), with an agreed rate of 2.41%, and with a notional principal of $1 million. 13. Would you be the buyer or seller of the FRA? Box AL 14. If you enter into this FRA on the date shown in Box J of Part 1, on what date will settlement take place? Box AM 15. If you enter into this FRA, what is the length of the borrowing period? Box AN months 16. If the appropriate BBSW on the settlement date is 2.17%, how much compensation will be payable under the FRA? Box AO $ 17. Will you pay or receive this compensation? Box AP FUTURES You decide the bank should hedge interest rate risk using 3-year ASX Treasury Bond futures contracts. 18. Would you buy or sell futures contracts? Box AQ 19. What is the interest rate implied by the quote you have shown in Part 1 for these contracs? Box AR % 20. Suppose you buy or sell 10 contracts at the quoted price. What is the total value of these contracts? Box AS $ 21. If you close out your futures position at a quoted price of 98.47, what is the total value of these contracts? Box AT $ 22. Would you have made a profit or loss from your futures position? Box AU 23. What would your result have been? Box AV OPTIONSOPTIONS You decide the bank should hedge interest rate risk using either a cap or a floor , based on the 6 - month BBSW , with semi- annual reset dates and a notional principal of $1 million . 24 . Would you use a cap or a floor ? BOX AW Suppose the 6 - month BBSW has the following values on the following dates :" 1 / 1 / 20 2. 48% 1 / 1 / 21 2. 26% 1 / 1 / 22 2. 12% 1 / 7 / 20 2. 67% 1 / 7 / 21 2. 05% 1 / 7 / 22 2.65% 25 . What will be the payoff on 1 / 7 / 21 ? BOX AX 1 SWAPS You decide the bank should hedge interest rate risk using a plain vanilla swap , with a fixed rate of 2. 68% and quarterly reset dates , based on the BBSW , and with a notional principal of $1 million . 26 . Would you be the fixed rate payer or the floating rate payer under the swap ?" BOX AY 27 . One year from now the BBSW is 2. 0% . What is the net amount that will be payable under the swap for that quarter ? BOX AZ S 28 . Would you pay or receive this amount ? BOX BARating 1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 yr Aaa/ AAA 21 26 38 45 53 55 61 65 70 76 Aa2/AA 30 32 42 53 65 72 83 95 108 121 A2/A 43 58 71 79 88 92 102 115 131 147 Baa2/BBB 96 111 132 144 153 160 178 204 230 253 Ba2/BB 172 272 331 346 343 335 336 341 349 361