Blog

What is the duration of a 5-year zero coupon bond yielding 10 percent annually?

Duration increases with the maturity of the asset.

Which of the following is not an expansionary monetary policy?

Assume that the face values of the following bonds are the same. Rank them in terms of how much of the value they would lose if interest rates rose: (Rank 1 is for the one that loses the most value, 3 is for the one that loses the least value) (1 point for each accurate ranking!) a. A 30-year Treasury bond with an annual coupon and interest rate of 6% b. A 30-year Treasury bond with an annual coupon of 6% and interest rate of 7% c. A 5-year Treasury bond with an annual coupon of 6% trading at par a,b,c ranked as:

Please use the following additional information for Questions 31-33: Third Bank has the following balance sheet (in millions) with the risk weights (under Basel III) in parentheses. In addition, the bank has $30 million in performance-related standby letters of credit (SLCs). Credit conversion factor and the risk weight for the standby LCs are 50% and 100%, respectively. Question: What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord?

Please use the following additional information for Questions 38-41: A financial institution originates a pool of 500 30-year mortgages, each averaging $150,000 with an annual mortgage coupon rate of 8 percent. Assume that the entire mortgage portfolio is securitized to be sold as GNMA pass-throughs. The GNMA credit risk insurance fee is 6 basis points and that the FI’s servicing fee is 19 basis points. Question: What is the annual rate of return for GNMA bondholders?

Please use the following additional information for Questions 38-41: A financial institution originates a pool of 500 30-year mortgages, each averaging $150,000 with an annual mortgage coupon rate of 8 percent. Assume that the entire mortgage portfolio is securitized to be sold as GNMA pass-throughs. The GNMA credit risk insurance fee is 6 basis points and that the FI’s servicing fee is 19 basis points. Question: What is the present value of the mortgage pool? 

The breakeven interest rate on a loan depends only on the loan’s probability of default and its loss given default (i.e. its salvage/recovery value).

Please use the following additional information for Questions 42-43: First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent. Question: What conclusions can you draw from the leverage-adjusted duration gap in your answer to the previous question? 

Please use the following balance sheet for Questions 27-29: Suppose there are two ratings categories: A and B, along with default. The ratings-migration probabilities look like this for a B-rated loan: The yield on A rated loans is 5%; the yield on B rated loans is 10%. All term structures are flat (i.e. forward rates equal spot rates). A loan in default pays off 50%.   Question: Using the mean as the benchmark, compute the 1-year VaR with 95% confidence interval for the  loan (based on the actual distribution).