Find the modified duration and convexity of the mortgages

Assignment Help Financial Management

Reference no: EM131531585

Consider three fixed rate mortgages, M1 ,M2 and M3 , and assume that the “fixed” rates may vary in parallel. The details of the mortgages are

Mortgage Principal Maturity Interest

M1 $ 400,000.00 10 years 8.00%

M2 $ 250,000.00 5 years 6.0%

M3 $ 150,000.00 3 years 5.0%

where all interest is compounded monthly. Mortgage repayments are assumed to be monthly.

Assume that a parallel shift in interest rates is the same thing as an identical shift in each of the yields to maturity and ignore the initial cashflow (that is, ignore the fact that the mortgagee receives the initial principal)

a. Find the yields to maturity of the mortgages, from the bank’s point of view.

b. Find the Macaulay, modified duration and convexity of the mortgages (again, from the bank’s point of view).

c. If the bank wishes to hedge one 10 year mortgage against parallel shifts in the interest rates using the 5 year mortgage, how many of the 5 year mortgages does it require? How might the bank achieve this?

Reference no: EM131531585

Questions Cloud

Issued non converitible perferred stocks with par value : Potter's Voilin Co. has just issued non converitible perferred stocks with a par value of $100 and an annual didvidend rate of 15.70 percent.

Write a one page paper on bimetalic temperature sensors : Write a one page paper on Bimetalic temperature sensors. How it works and an application

Government fiscal policy : Between 2007 and 2009 the U.S. economy experienced a severe recession. In an effort to stimulate the economy, the federal government

The development of their understanding of social inequality : Write individual papers about the development of their understanding of social inequality.

Find the modified duration and convexity of the mortgages : Find the yields to maturity of the mortgages, from the bank’s point of view. Find the Macaulay, modified duration and convexity of the mortgages.

Critical consumer of the news : Identify and explain the steps that one must take to be a critical consumer of the news, and describe a time where you failed to be a critical consumer.

Business proposal to help justify : Include SWOT analysis in your business proposal to help justify why you have selected this option or why you have chosen to take this course of action.

What would happen to the musk oxen population after six year : What would happen to the Musk Oxen population after the six year period? What might happen if the environment was not free of predators? WHY?

Initial discussion question : After reviewing and analyzing one of the current events articles, post your analysis for your classmates to review.

User Account

All Pages