Reference no: EM13932662

1) There is no "formula" for maturity model. A six month treasury bill's maturity is 0.5 year and the maturity for a five year loan is, 5years. In the case of the maturity of asset/liability:

a. Sum the total value of asset/liability, and then divide the value of individual asset by the total value of asset to get the weight.

b. Multiply the maturity of the asset with the weight the security carries (on the asset/liability) to get the individual weighted maturity

c. Sum up all the individual weight adjusted maturities to get the total maturity.

2) Both repricing and maturity models use the book value approach (i.e. the amount you see in the question). This is also highlighted in the textbook.

3) Duration uses market value approach. i.e. you will need to work out the price of the securities AND work out a new total asset value (and the only item in liability).

a. Price of the security: If you are using the column approach (long way), price is sum of all the present values. If you plan to use the duration formula in excel, then you can use the price function [=price()] or the present value function [=pv()].

b. When you are working out the total market value of the security:

i. Assume $100 face value for each security (or $1000,$10,000)

ii. Divide the current book value by the face value you used in (1) above should give you the number of units the FI holds.

iii. Number of units the FI holds multiply by the current market price per unit you calculated from (a) above will give you the total value of the interest rate sensitive item. (Looks familiar? Remember back in Corporate Finance/Financial Management when you want to
work out the WACC for your preference shares, equity, bonds using market value??)

4) Duration, you can calculate the duration for an interest rate sensitive transaction using duration function in excel. May take you 10min to work out how the function works, but will save you hours working through the items manually.

• =DURATION() [click here for example]

• If it is a 3 year bond, the settlement date can be any date (say, "23 January 2013") as long as you set the maturity date to 3 years later (i.e. "23 January 2016")

5) State your assumptions: If there is anything you are not clear. Some other things you need to consider (if you haven't yet) E.g. car loan or commercial loan

a. Unless stated otherwise, most bonds pay interest on a semi-annual basis.

b. Annual/monthly/fortnight repayment

c. Amortised or balloon payment (a) and (b) will affect how you calculate the duration of those items as well as their market
price.

d. The easiest way would be to assume these items receive semi-annual interest and principal is repaid on the maturity date of the loans (but this is unrealistic).6) Treatment of Cash, demand deposits, savings account. Read the textbook chapter 5 (p.149).

If you do a bit of research you will find treatment of "Overnight repo" is on a bit of grey area. Some policy makers, researchers, think we should, some would argue otherwise. In your case state your assumption.