Instruments of Money Market and Foreign Exchange Market Policy - Assignment Example

Name: Lecturer: Course name: Course code: Date Q1) a) what will be the net interest income at the end of the first year Net interest income =Interest income - Interest expense NI = (10%$10,000) – (6%*10,000) = $400 B).what will be net income for the 2nd year NI= (10%$10,000) – (6%*10,000) = $ 300 The decline in net interest income is brought about by incline in financing cost devoid of equivalent to incline in earning rate .hence change in net interest income is cause by refinancing threat. Interest income is not affected by incline in market interest rate due to the fact that thje bond has a constant coupon interest rate if ten years. C). market value of equity for FI Cash $1,000 cert of deposit $10,000 Bond $9,446 Equity $446 Total assets $10,446 total equity and liability $10,446 D).would the market value of equity There would be a higher value of market equity by $1,600 because the value of the bond would be much high ($10,600) and the worth of CD would remain unaffected E).factors that have caused change in operating performance and market value of the firm. The changes in the market interest rate have led to change in the operating performance of the company. These changes lead to change in the interest income and interest expense and change was brought about by exclusive maturity of fixed rate assets and fixed rate liabilities. Also the economic market condition prevailing was brought about by change in the rates on the market significance of the bond. Q2) impact on the bank’s net interest income if at the end of the first year all interest rates have increased by 1 % Year 1 Interest incomer 10%*50 million = $ 5,000,000 Interest expense on the liability= 8%*50 million = $ 4000, 0000 Hence net interest income= 5,000,000-4,000,000 = $1,000,000 In year two Interest incomer 10%*50 million = $ 5,000,000 Interest expense on the liability= 9%*50 million = $ 4,500, 0000 Hence net interest income= 5,000,000-4,500,000 = $500,000 Q3a) the price Year to maturity (YTM) = {FV/P^1/N-1 A) $ 1000 face value received in five years yielding an annual rate of 8 per cent. Price = 5yrs = 1000/p-1= 8% 0.125√1.05=1000 = $ 676.84 B). $1000 face value received in three years yielding an annual rate of 6% Price = 3yrs = 1000/p-1= 6% 0.33√1.03=1000 = $ 915.14 C)) 100000 face value received in 10 years yielding an annual rate of 13% Price = 10yrs = 100,000/p-1= 13% 0.1√1.13=100,000 = $ 29,458,835 d) $1000 000 face value received in two years yielding an annual rate of 7% Price = 2yrs = 1000, 000/p-1= % 0.5√1.07=1000, 000 = $ 873,438.72 E) $1000 000 face value received in six months yielding an annual rate of 7 per cent. Price = 1yrs = 1000, 000/p-1= 7% √1.07=1000, 000 = $ 934,579.44 Q4F Calculate the value of each of the bonds if all yields increased by 1 per cent. A). $ 1000 face value received in five years yielding an annual rate of 8.08 per cent. Price = 5yrs = 1000/p-1= 8.08% 0.123√1.05=1000 = $ 674.2 B). $1000 face value received in three years yielding an annual rate of 6.06% Price = 3yrs = 1000/p-1= 6.06% 0.33√1.06=1000 = $ 838.14 C)) 100000 face value received in 10 years yielding an annual rate of 13.13% Price = 10yrs = 100,000/p-1= 13% 0.1√1.1313=100,000 = $ 29,122.062 d) $1000 000 face value received in two years yielding an annual rate of 7.07% Price = 2yrs = 1000, 000/p-1= % 0.5√1.0707=1000, 000 = $ 872,297.03 E) $1000 000 face value received in six months yielding an annual rate of 7.07 per cent. Price = 1yrs = 1000, 000/p-1= 7% √1.0707=1000, 000 = $ 933.968.43 G) Calculate the percentage price changes for each the bonds if all yields increased 1 per cent. A). ($ 676.84- $ 674.2)/674.84}*100% = 0.4% B) ($ 915.14- $ 838.14)/915.14*100% = 8.84% C). ($ 29,458,835 - $ 29,122.062)/ ($ 29, 458, 83}*100% = 1.14% D). ($ 873,438.72 - $ 872,297.03)/ ($ 873,438.72}*100% = 0.13% Q4 a) What is the value of M. Match Ltd’s equity? b) What is the weighted average maturity of the FI’s assets? Maturity of Asset = (2*4175 + 15*$165}/ $340 = 8.3 yrs c) What us the weighted average maturity of the FI’s liabilities Maturity of Liability = (1*$135 + 5*$160)/$295 = 3.2 yrs d) What is the FI’s maturity gap? Maturity gap = 8.3yrs – 3.2 yrs = 5.1 yrs e) What does your answer to part (d) imply about the interest rate risk exposure of M.Match Ltd? M.Match Ltd is uncovered to threat of interest rate because an incline in interest rate would lead to a decline in net value because a higher maturity period is envisaged. f) Calculate the values of all four securities on M. Match Ltd’s balance sheet if all interest rates increase by 2 % 1).T- Note: Pv = 8.75*pvifa7%^2yrs + 175*pvifa7%^2yrs = $ 168.67 2).Munis: Pv = 14.85* pvifa11%^15yrs + 165*175*pvifa11%^15yrs = $ 141.27 3). Commercial paper: Pv = 6.075* pvifa6.5%^15yrs + 135*pvifa6.5%^1yrs = $132.46 4).Note: Pv = 12.80* pvifa10%^5yrs + 160*pvifa10%^5yrs = $ 147.87 Total assets = $ 168.7 + $ 141.27 = $ 309.9 %Change in asset $-30.06 Total, liabilities = $132.46 + $147.87 = $ 280.33 Change in liabilities = $ -14.67 g) What is the impact on the equity of M. Match Ltd? Calculate the percentage change in the value of equity. Change in Equity = change A – change in L Change in Equity= ($-30.06+ $ 14.67) = - 34, 2% h) What would be the impact on M.Match Ltd’s interest rate risk exposure if its liabilities paid interest semi- annually as opposed to annually? The worth of the liability will much inferior with semi-annual compounding hence leading to an increase in the value of net worth. One year CP will be at a lower level of $ 132.43, 5 year note will decrease in its worth to $ 147.7 leading to increase in the value of Equity to {$168.7 + $1241.3} - {$132.4 + $ 1457.7} = $ 29.87 Q5) what is the price of a newly tendered five- year Treasury bond with a coupon of 7 per cent and a yield of 7.05 per cent Investment yield = R+ (FV-PP/M)/ (FV+PP)/2 Where: R is the coupon rate; FV is the face value PP purchase price M years to maturity 7.05% = 7 %+( $100- y/5yrs)/ ($100+y)/2 = 0.05%= 9990- y^2 Y= √9990 Price of a newly tendered five =$ 99.95 Q6) a) What are all of the promised cash flows on a $1000 one –year loan yielding 10 per cent p.a. that pays interest and principal quarterly Interest rate 10%/4quarters = 2.5% Future value (FV) = present value (PV) 1+L) ^n Hence FV = $10,000(1.025= $1131.4 b) What is the present value of the loan if interest rates are 10 per cent p.a.? PVA = $10,000(1-(1/1.1)^1/0.1} = PVA= 10,000* 0.909=$ 9,090.09 c) What is the present value of the loan if interest rates are 8 per cent p.a.? PVA = $10,000(1-(1/1.08)^1/0.08} = PVA= 10,000* 0.9226=$9,259.26 Q7). What would the duration be if today’s yield was 5.5% time (yr) CF PV of CF PV of CF*t 1 $10,000 $9,090.09 $9,090.09 2 $110,000 $90,909.09 $181,818.20 $120,000 $99,999.18 $190,908.27 The duration (190,908.27/99/999.18) = 1.9090 Q8) A). what is the repricing or funding gap if the planning period is 30 days? 91days? Two years? Funding or repricing 30day period Planning period (75 – 170 = -95 M Funding gap (91 day planning period) (75* 2)-170 = -$20M B) What is the impact over the next 30 days on net interest income if all interest rates rise by 50 basis points? The net interest income will turn down by $475,000 NI = -95(0.005) = $ 0.475 M Net interest income will incline by ($712,500Δ Nil = Fg{Δr} Hence -95(-0.0075) = $ 0.7125M Net interest income will increase by $712,500. ΔNII = FG(ΔR) = -95(.0075) = $0.7125m. c) If the duration of assets is 3.41 years and the duration of liabilities is 3.5years, what is duration gap? Duration Gap = (3.41 – 5.5) = -0.09 d) What conclusions regarding J.P.Mersal Citover’s interest rate risk exposure can you draw from the duration gap in your answer to part(c)? If the rate ascends, the value of the assets will decline more than to the value of the assets. From the repricing or funding gap (30 days’ planning period) The repricing period depicts a deficiency Gap of -20 million imply that this would bring a significant loss to the company if stringent measures are not adopted to curb the situation. Reference Choudhry, M. (2003). In Bond and Money Markets: Strategy, Trading, Analysis. Dunnen, E. d. (1985). In Instruments of Money Market and Foreign Exchange Market Policy in (p. ppg 10). Frank J. Fabozzi, C. ‎. (2003). In Measuring and Controlling Interest Rate and Credit Risk.   Read More