__BANK FINANCIAL MANAGEMENT (BFM) __

Unit - 13c: Numerical - Time Horizon & Bond Value

Unit - 13c: Numerical - Time Horizon & Bond Value

Solution

Monthly volatility = Daily Volatility * ∫30 = 2*∫30

= 2*5.477 =

Solution

Annual Volatility = Daily Volatility * ∫250 =

Daily Volatility * 15.81

30 = Daily Volatility *15.81

Daily volatility = 30/15.81 =

Solution

97% confidence level means loss may exceed the given level (50000)on 3 days out of 100.

If out of 100 days loss exceeds the given level on days =3

Then out of 300 days, loss exceeds the given level = 3/100*300 =

Solution

Increase in yield will affect the bond adversely and the bond will lose.

Since BPV of the bond is Rs. 50/-. Increase in yield by 2 bps will result into loss of value of Bond by 50*2=100.

Ans. 90% confidence level means on 10 days out of 100, the loss will be more than Rs. 50000/-.

Out of 250 days, loss will be more than 50000/- on

Face Value 100 100

Annual Coupon 8% 10%

Term to Maturity 3 yrs 4 yrs

Market Price 80 90

Solution

Coupon amount X100 = 10/90*100 = 11.11%

Market Value

YTM of Bond 1 = 17.07%

YTM of Bond 2 = 13.41%

2.76 years

Find Modified Duration of Bond 2

Solution

McCauley duration/1+yield

=3.46/(1+13.41%) = 3.46/1.1341 = 3.05 yrs.

Expected %age change in price

=Modified Duration x %age change in yield

=3.5 x 1 = -3.05% (Decrease in price of bond)

=3.5 x 1 = 3.05% (Increase in price of bond)

Bond 1 (YTM is more)

Potential Financial impact =4

Impact of Internal controls = 0%

{ Probability of occurrence x Potential financial impact x Impact of internal controls } ^0.5

=(4x4) ^0.5 = ∫16 =

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