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Equity Question 5 (Total 17 marks) The balance sheet for QMA bank is as below: Assets Value ($ million) Liabilities and Equity Value ($ million Cash $30 Term deposits $20 Treasury bond 20 Federal funds 50 Floating loans 105 Euro CDs 130 Corporate bonds 65 20 Total assets $220 Total liabilities and $220 equity Notes to the balance sheet: The Treasury bond rate is 8.5 percent, the floating loan rate is LIBOR (London Interbank Offered Rate) + 4 percent, and currently LIBOR is 11 percent. Corporate bonds have five-year maturities, are priced at par $1,000, and pay 12 percent annual interest. The principal is repaid at maturity. Term deposits are fixed rate for two years at 8 percent paid annually. The principal is repaid at maturity. Euro CDs currently yield 9 percent. Required: [Hints: the requirements refer either assets, or liabilities or both] a. What is the duration of the corporate bonds (one of QMA Bank assets)? (3 marks) b. If the duration of the floating loans is 0.36 year, the duration of Treasury Bond is 0.36 year and duration of cash assets is zero, what is the average duration of QMA bank's assets? (2 marks) c. What is the duration of the Term deposits if they are priced at par (for example $20 million)? 3 marks) d. If both durations of the Euro CDs and federal funds liabilities are 0.401 years, what is the duration of QMA bank's liabilities? (2 marks) e. What is the impact on the market value of assets and liabilities if the relative change in all interest rates is an increase of 1 percent (100 basis points)? Note that the relative change in interest rates is AR/(1+R) = 0.01.(4 marks) f. What is the interest rate risk immunization and how can the QMA bank immunize the interest rate risk? (Discuss broadly). (3 marks) Equity Question 5 (Total 17 marks) The balance sheet for QMA bank is as below: Assets Value ($ million) Liabilities and Equity Value ($ million Cash $30 Term deposits $20 Treasury bond 20 Federal funds 50 Floating loans 105 Euro CDs 130 Corporate bonds 65 20 Total assets $220 Total liabilities and $220 equity Notes to the balance sheet: The Treasury bond rate is 8.5 percent, the floating loan rate is LIBOR (London Interbank Offered Rate) + 4 percent, and currently LIBOR is 11 percent. Corporate bonds have five-year maturities, are priced at par $1,000, and pay 12 percent annual interest. The principal is repaid at maturity. Term deposits are fixed rate for two years at 8 percent paid annually. The principal is repaid at maturity. Euro CDs currently yield 9 percent. Required: [Hints: the requirements refer either assets, or liabilities or both] a. What is the duration of the corporate bonds (one of QMA Bank assets)? (3 marks) b. If the duration of the floating loans is 0.36 year, the duration of Treasury Bond is 0.36 year and duration of cash assets is zero, what is the average duration of QMA bank's assets? (2 marks) c. What is the duration of the Term deposits if they are priced at par (for example $20 million)? 3 marks) d. If both durations of the Euro CDs and federal funds liabilities are 0.401 years, what is the duration of QMA bank's liabilities? (2 marks) e. What is the impact on the market value of assets and liabilities if the relative change in all interest rates is an increase of 1 percent (100 basis points)? Note that the relative change in interest rates is AR/(1+R) = 0.01.(4 marks) f. What is the interest rate risk immunization and how can the QMA bank immunize the interest rate risk? (Discuss broadly)