Currently Im studying for my banking, insurance and risk exam and need some help with two questions of a test exam im making.
The exam has its answer already displayed. However, I cant get to the exact calculations and answer of question b and c.
At question b I am able to compute everything right, except for the duration and convexity of 0,86.
At question c I am unable to get the exact right answers on all 3 questions. I get very close (like 3,84 at partial duration and 1,98 at liabilities).
Could anyone help me out? I would be very gratefull.
Market value of assets:
0,5 year loan 30,073
4 year loan 82,96
market value of liabilities
1 year CD 49,98
2 year CD
market value of equity 10,88
Calculate the duration and convexity of assets and liabilities, and use both to predict the market value of equity would be when the yield curve shifts upwards in a parallel fashion with 7%. how would your answer change when you only use duration and diregard convexity?
0,5 year interbank Duration=0,5, convexity =0,25
4 year loan Duration =3,848, convexity = 15,14
1 year CD Duration =1 convexity =1
2 year CD Duration =1,978, convexity = 3,935
New equity = 10,88-12,67=-1,79
Duration and convexity:
New equity = 10,88 - 10,02 = 0.86 (this is the one I am unable to answer in a correct way)
Use the partial duration gap approach to calculate the market value of equity when the zero-rates up starting from (and including) 2 years are increased by 1,5 percentage points)
Partial duration of assets (and including) 2 years = 3,823
Partial duration of liabilities (and including) 2 years = 1,957
New equity = 10,88-3,22=7,66