Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $800M 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% (borrowing money) $300M 1.941 2.384 4yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206 In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise? Do you agree with the following statement? Explain why.“The information about a bond’s duration and convexity adjustment is sufficient to quantify interest rate risk exposure.”Thank You

Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.026 12yr...

Consider a bank with the following balance sheet (M means million):

Assets

Value

Duration of the Asset

Convexity of the Asset

5yr bond bought at a yield of 3.4% (lending money)

$550M

4.562

12.026

12yr bond bought at a yield of 4% (lending money)

$800M

9.453

53.565

Liabilities	Value	Duration of the Liability	Convexity of the Liability
2yr bond sold at a yield of 2.4% (borrowing money)	$300M	1.941	2.384
4yr bond sold at a yield of 2.8% (borrowing money)	$500M	3.759	8.206

In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?

“The information about a bond’s duration and convexity adjustment is sufficient to quantify interest rate risk exposure.”

Thank You

Jun 04, 2022