Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the following information about an issue of UK gilt bonds with 3 year maturity. An individual gilt is currently selling at 79.58, has a

image text in transcribed

Consider the following information about an issue of UK gilt bonds with 3 year maturity. An individual gilt is currently selling at 79.58, has a yield-to-maturity of 4.5%, and a coupon rate of 3%. Recall the formulas for a coupon bond and for a loan with repayments: = + FV Coupon Bond: P = + + + (1+i) (1 + i)2 (1+i)" (1 + i)" CF CF CF Loan: L= + + + (1+i) (1 + i)2 (1+i)n a) Assuming the bond is correctly priced, calculate what its face value should be at this price. How much would it cost the bank to purchase 40,000 units of this issue of the bond? (10 points] b) Calculate the yearly payment if the bank decided to fund this pur- chase with a loan maturing in two years at an interest rate of 2% and discuss whether the bank is exposed to refinancing or reinvestment risk. (10 points) c) Which of these assets is more sensitive to changes in the interest rate? Should the bank be worried about an increase or a decrease in the interest rate? [5 points] Consider the following information about an issue of UK gilt bonds with 3 year maturity. An individual gilt is currently selling at 79.58, has a yield-to-maturity of 4.5%, and a coupon rate of 3%. Recall the formulas for a coupon bond and for a loan with repayments: = + FV Coupon Bond: P = + + + (1+i) (1 + i)2 (1+i)" (1 + i)" CF CF CF Loan: L= + + + (1+i) (1 + i)2 (1+i)n a) Assuming the bond is correctly priced, calculate what its face value should be at this price. How much would it cost the bank to purchase 40,000 units of this issue of the bond? (10 points] b) Calculate the yearly payment if the bank decided to fund this pur- chase with a loan maturing in two years at an interest rate of 2% and discuss whether the bank is exposed to refinancing or reinvestment risk. (10 points) c) Which of these assets is more sensitive to changes in the interest rate? Should the bank be worried about an increase or a decrease in the interest rate? [5 points]

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_2

Step: 3

blur-text-image_3

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

Bond Markets Analysis And Strategies

Authors: Frank J. Fabozzi

6th Edition

0131986430, 9780131986435

More Books

Students also viewed these Finance questions