Question
Consider a financial institution, which has a liability with a face value of 121 AUD, which matures in 2 years from now. The current market
Consider a financial institution, which has a liability with a face value of 121 AUD, which matures in 2 years from now. The current market interest rate is 10%.
a) Calculate the present value of the liability. Now the financial institution has an investment opportunity to invest 100 AUD in
i) 1 year zero coupon bond or ii) 5 year zero coupon bond.
b) Calculate the promised repayment for the two investment options. From now on, the promised repayment is fixed for the assets and is not affected by interest changes in the market.
c) Calculate the value of the asset - liability for the current situation and an investment in either i) or ii).
d) Calculate the value of the asset - liability for an interest rate increase to a new rate of 15%. Calculate the value for both options of an investment in either i) or ii).
e) Calculate the value of the asset - liability for an interest rate decrease to a new rate of 5%. Calculate the value for both options of an investment in either i) or ii). f) Interpret your result.
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