Question

PLEASE SHOW ME THE STEP BY STEP FOR THE CALCULATION AND GIVE EXPLANATION

1. Suppose a bond has a value of $ 2 million and the duration is 4 years. The current interest rate is 10%. If the interest rate changes by 1% (interest rate becomes 11%), what is the new value for the bond?

A. $1,623
B. $1963
C. $1,801
D. $1,927
E. None above

2. Ceteris paribus, if we expect that interest rate is going to increase, we prefer to have

A. Positive duration gap
B. Negative maturity gap
C. Positive repricing gap
D. Positive duration gap and positive repricing gap
E. None above

3. Suppose a bank calculates its daily 90% Value at Risk as $1 million. What does it mean?

A. If tomorrow is a bad day, the bank will experience a loss of $1 million with a probability of 10%
B. If tomorrow is a bad day, the bank will experience a maximum loss of $1 million with a probability of 10%
C. If tomorrow is a bad day, the bank will experience a maximum loss of $1 million with a probability of 90%
D. If tomorrow is a bad day, the bank will experience a minimum loss of $1 million with a probability of 90%
E. If tomorrow is a bad day, the bank will experience a maximum loss of $1 million with a probability of 10 to 90%

Answer 1

a)

bond value	2000000
current interest	10%
new interest	11%
Duration	4.0000	years
value of cash flows annual cash flow	630941.61
	PMT(D3,D5,-D2)
same cash flow discounted with 11 %	$ 19,57,462.07
	PV(D4,D5,-D6)

hecce no option is correct .so we shall choose option E.

2)

A positve gap is aconsidered when bank interest rate senstive assets exceeds banks interest rate sensitive libility. a positive gap means banks profit will likly to rise with interest rate.

Hence option c is correct.

3)

when bank calcualte Vaue at risk is 1 million with 90 % it means as per past data banks shall not suffer loss more then 1 milion in 90% of the bad days.

Hence option C is correct "If tomorrow is a bad day, the bank will experience a maximum loss of $1 million with a probability of 90%"