Question 2 (a)

Bank Sentral, the safest credit rating, has 12-year zero-coupon bonds with a face value of $125 million. The bonds are currently yielding 6.50 per cent in the over-the-counter market. (i) What is the price volatility if the potential adverse move in yields is 15 basis points? (ii) What is the daily earnings at risk? (iii) The price volatility is based on a 95 per cent confidence limit and a mean historical change in daily yields of 0.0 per cent, what is the implied standard deviation of daily yield changes? (iv) What would be the Value at risk (VAR) for the bond for a 20-day period? Why is the VAR for 20-day period 20 times (or not) as much as for DEAR?

(b)

Which approach is claimed to have the primary disadvantage of confidence level contained in the number of days over the analysis? Explain how it could be implemented.