Define interest rate risk. Explain the two types of interest rate risk. Explain duration and bond properties and describe how an investor with a given holding period can use duration to reduce interest rate risk.
Define interest rate risk. Explain the two types of interest rate risk. Explain duration and bond...
T/F Duration is a measure of interest rate sensitivity and a bond with a duration of 9 should go up 9% if rates go down 1% T/F A bond that matures in 8 years has a shorter duration then a bond that matures in 5 years all else equal. T/F A bond with a 5% coupon has a shorter duration than a bond with a 4% coupon all else equal T/F U.S. Treasury notes and bonds have no credit spread...
6) Please explain what is meant by the duration and convexity of a bond. How do we go about deriving the duration and convexity of the bond? Why is it so important that we are able to calculate these properties for determining the interest rate risk of my securities? Explain other applications of calculus that was used in the program
"If the investment horizon is equal to the Macaulay duration of the bond, the investor is hedged against interest rate risk". However, the above statement is only true if interest rates only change before fist coupon payment is received. Using the following bond to show that if interest rate increases 2% between first and second coupon payment dates, the investor is not hedged against interest rate risk even if his duration gap is zero.: A four-year 33.7% annual coupon paying...
roduce a table showing bond values and interest rate risk over the duration of a bond and a diagram demonstrating the link between interest rate risk and time to maturity. The bond has a face value of $1,000, pays a coupon rate of 9% and is issued with 10 years to maturity. All calculations should be executed in excel. Your table should show the following: The value of the bond, year by year, from date of issue until its...
Lia bilities Duration 7 years $120 Duration 5 years $108 Average interest rate 6.00% $12 Al What is the bank's duration Ga 1 What is the bank's interest rate risk exposure? Why? (Hint: this is a qualitative question: exposure if interest rate increase or decrease? Justify your answer C) How can the bank use futures ajd forward contracts to put on a macro-hedge Hint: this is a qualitative question) what is the impact on the bank's equity if the interest...
Lia bilities Duration 7 years $120 Duration 5 years $108 Average interest rate 6.00% $12 Al What is the bank's duration Ga 1 What is the bank's interest rate risk exposure? Why? (Hint: this is a qualitative question: exposure if interest rate increase or decrease? Justify your answer C) How can the bank use futures ajd forward contracts to put on a macro-hedge Hint: this is a qualitative question) what is the impact on the bank's equity if the interest...
Explain how savings institutions could use interest rate swaps to reduce interest rate risk. Will Sis that use swaps perform better or worse than those that were unhedged during a period of declining interest rates? Explain.
a) A portfolio manager wants to estimate the interest rate risk of a bond using duration. The current price of the bond is 98. A valuation model found that if interest rates decline by 35 basis points, the price will increase to 101 and if interest rates increase by 35 basis points, the price will decline to 96. What is the duration of this bond? b) A portfolio manager purchased a bond portfolio with a market value of $75 million....
1) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond? 2) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction? 3) Normally, the Treasury yield curve is upward-sloping. Explain the conditions required...
1. When the investors duration gap is negative: A. Reinvestment risk dominates, and the investor is at risk of lower rates. B. The investor is hedged against interest rate risk. C. Market price risk dominates, and the investor is at risk of higher rates. D. The investor is at risk of both lower rates and higher rates. Please explain your answer.