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A bank has a $2 million market value position in a 6-year, zero coupon bond. The...

A bank has a $2 million market value position in a 6-year, zero coupon bond. The bond is yielding 8%. The mean change in the daily yields of the 6-year, zero coupon bond has been 2 basis points over the past year with a standard deviation of 10 basis points. Using these data and assuming the yield changes are normally distributed:

(a) What is the highest yield change expected if a 99 percent confidence level is required?

(b) What is the daily earnings at risk (DEAR) using a 99 percent confidence level?

(c) Please interpret in words the meaning of the DEAR you calculated in part (b).

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