Question
Consider a 5-year bond with annual coupon payments. The bond has a face value (principal) of $100 and sells for $95. Its coupon rate is
Consider a 5-year bond with annual coupon payments. The bond has a face value (principal) of $100 and sells for $95. Its coupon rate is 3%. (The coupon rate is the ratio between the coupon value and the face value). The face value is paid at the maturity year in addition to the last coupon payment.
This part was extracted from the balance sheet of the First Bank of Australia:
Assets (Billion AUD) Liabilities (Billion AUD)
Bond 80 Fixed-rate liabilities 60
where \Bond" here refers to the bond we specified above and the fixed-rate liabilities (banks future payment obligations) have an average duration of 4 years and YTM of 3%. Their YTM changes in the same way as a 5-year T-bill interest rate. 3. Bank's equity is the difference between its assets and its liabilities. How does a bank's equity change, if the T-bill interest rate increases by 10 basis points? (2 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started