Interest-sensitive assets

Assignment Help Financial Management

Reference no: EM13812359

1. The portfolio managers of a firm determined that over the next year interest-sensitive assets are in the amount of $1.5 billion while interest-sensitive liabilities are in the amount of $1.8 billion. Moreover, when considering all of the firm's assets and liabilities, they determined that the average duration of assets is 3.6 years while the average duration of liabilities is 4.0 years. The firm’s debt-to-equity ratio is 4-to-1.

1) Calculate GAP and Duration GAP (DGAP) for this situation.

2) What will happen to net interest income and relative asset prices (market values) as interest rates rise or fall?

(In other words, how are net income and overall market value impacted by changes in interest rates?)

3) What strategies could management employ to hedge against this risk? For instance should it buy or sell futures, call options or put options (i.e., for each derivative is it a buy or sell strategy?)?

Reference no: EM13812359

Questions Cloud

The stock price will grow at a constant : Which is the amount that should be paid for a stock that will pay a dividend of $3.18 in one year and $5.57 in two years? After that, the stock price will grow at a constant 5% per year forever. The appropriate discount rate is 12%. Show your answer..

What does a net present value of zero mean : According to the textbook, the net present value rule states that “An investment should be accepted if the net present value is positive and rejected if it is negative.” What does a net present value of zero mean? If you were analyzing a project with..

Explain why the reward-to-risk ratio : Given that higher risk investments, such as small-company stocks, have outperformed other investments over time, why don't all investors choose to invest only in these high risk securities? Explain why the reward-to-risk ratio must be equal for all s..

Firm decides to issue debt in order to repurchases : Consider a world where the M&M Corporate Taxes Capital Structure theory is true, then answer the following question. An all-equity firm currently has a market value of $622.09. The firm decides to issue debt in order to repurchases $126.48 in equity...

Interest-sensitive assets : The portfolio managers of a firm determined that over the next year interest-sensitive assets are in the amount of $1.5 billion while interest-sensitive liabilities are in the amount of $1.8 billion. What will happen to net interest income and relati..

Capacity to conduct a successful capital campaign : Review chapter 14 in The Complete Guide to Fundraising Management by Weinstein. Write a critical assessment of your organization's need for and capacity to conduct a successful capital campaign. Outline the key features and requirements of a capital ..

Investments future value in terms of purchasing power : You are planning to invest $2,500 today for three years at nominal interest rate of 9 percent with annual compounding. What would be the future value of your investment? Now assume that inflation is expected to be 3 percent per year over the same thr..

Chief harm-based arguments against insider trading : Explain the two chief harm-based arguments against insider trading. What does Jennifer Moore say about these arguments? Can you identify another problem with either argument?

Budget is prepare anticipating distribution of overhead cost : A company is composed of five cost centers. Each month a budget is prepared anticipating the distribution of overhead costs to the centers. Let Cw be costs incurred within the cost center, such as depreciation, supplies and indirect labor, and let Cm..

User Account

All Pages