Find what is the usefulness of convexity

Assignment Help Financial Accounting

Reference no: EM132667286

Use this balance sheet information to answer the following questions:

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Duration of Cash =0

Duration of Loans(Special)= 1.9512

Amount of Euro CDs=300

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.

Question 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?

Duration = 1.9512

Duration of Assets = 2.275

Duration of Liabilities = 1.083

Duration Gap = 1.3003

Change in Equity = -9.2879

Question 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?

Question 3: Use this information to determine the impact on the market value of the bond loan and the amortised loan if the entire yield curve shifted downward 50-basis points.

Question 4: 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: EM132667286

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