Commercial Banking

QUESTION 1b [ 4+6+5 = 15 marks) Calculate the convexity for a three-year 5% coupon rate with a face value of $500,000 loan. What is the convexity of the same loan but with amortised payments? Use this information to determine the impact on the market value of the bond loan and the amortised loan if the entire yield curve shifted downward 50-basis points. What is the usefulness of convexity when duration is available as a measure of interest rate risk? What is the practical implication for the three-year loan in this example? QUESTION 1b [ 4+6+5 = 15 marks) Calculate the convexity for a three-year 5% coupon rate with a face value of $500,000 loan. What is the convexity of the same loan but with amortised payments? Use this information to determine the impact on the market value of the bond loan and the amortised loan if the entire yield curve shifted downward 50-basis points. What is the usefulness of convexity when duration is available as a measure of interest rate risk? What is the practical implication for the three-year loan in this example