Calculate convexity for three-year five percent coupon rate

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Reference no: EM132665751

The bank has granted a special loan that has 3 years to maturity and has repayments of $357.875 million at the end of year 1, no payment at the end of year 2 and $357.875 payments at the end of year 3. The loan is trading at par and the yield to maturity is 5 percent per annum.

Problem 1: Assuming a flat yield curve and a parallel shift of the entire yield curve of 50-basis points upward what is the impact on the FI's market value of equity?'

Problem 2: Calculate the convexity for a three-year 5% coupon rate with a face value of $500,000 loan. What is the convexity of the same loan but with amortised payments?

Problem 3: What is the usefulness of convexity when duration is available as a measure of interest rate risk? What is the practical implication for the three-year loan in this example?

Reference no: EM132665751

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