Question
Consider an asset with a current market value of $300,000 and a duration of 3.8 years. Assume the asset is partially funded through zero-coupon bonds
Consider an asset with a current market value of $300,000 and a duration of 3.8 years. Assume the asset is partially funded through zero-coupon bonds which currently sells for $250,000 and has a maturity of 4.2 years. The current discount rate is 8% and interest rates are expected to decrease by 120 basis points.
REQUIRED
(1) Calculate the change in the net worth. Round up to 2 decimal places. Show full workings.
(2) What should the duration of liability be to fully immunise the balance sheet? Show full workings.
(3) List one problem of using duration model to manage interest rate risk. Briefly explain.
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
1 To calculate the change in net worth we need to calculate the initial market value of the liabilities and the asset and then calculate the new marke...
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Step: 3
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Corporate Finance
Authors: Jonathan Berk and Peter DeMarzo
3rd edition
978-0132992473, 132992477, 978-0133097894
