Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider a bank that holds government bonds and consumer loans as assets. In particular, the bank holds a zero-coupon government bond with maturity of 10

image text in transcribed

Consider a bank that holds government bonds and consumer loans as assets. In particular, the bank holds a zero-coupon government bond with maturity of 10 years that promises to pay 15m in year 10. The bank's loan portfolio matures in 2 years: it pays 2m in the first year and 12m at the end of the 2nd year. The bank has 20m (present value) worth of liabilities with an average duration of 4 years. The risk-free interest rate is 5%. a) What is the (present) value of bank's assets? What is the value of bank's equity? b) What is the average duration of the bank's assets? c) What change in the interest rate would make the bank insolvent? d) How can the bank eliminate interest rate risk? Explain the possibilities in this case. Keeping everything else the same, what should the duration of the bank's liabilities be to make the bank's value insensitive to changes in the interest rate? Consider a bank that holds government bonds and consumer loans as assets. In particular, the bank holds a zero-coupon government bond with maturity of 10 years that promises to pay 15m in year 10. The bank's loan portfolio matures in 2 years: it pays 2m in the first year and 12m at the end of the 2nd year. The bank has 20m (present value) worth of liabilities with an average duration of 4 years. The risk-free interest rate is 5%. a) What is the (present) value of bank's assets? What is the value of bank's equity? b) What is the average duration of the bank's assets? c) What change in the interest rate would make the bank insolvent? d) How can the bank eliminate interest rate risk? Explain the possibilities in this case. Keeping everything else the same, what should the duration of the bank's liabilities be to make the bank's value insensitive to changes in the interest rate

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Economics And Finance Of Professional Team Sports

Authors: Daniel Plumley, Rob Wilson

1st Edition

0367655667, 978-0367655662

More Books

Students also viewed these Finance questions

Question

3. Deal with less-severe problems later.

Answered: 1 week ago

Question

Explain the various methods of job evaluation

Answered: 1 week ago

Question

Differentiate Personnel Management and Human Resource Management

Answered: 1 week ago

Question

Describe the functions of Human resource management

Answered: 1 week ago

Question

=+ How can they be incorporated into social media content?

Answered: 1 week ago