FINAL CORRECTION
1. 360/90 (100- Y) = 6 Therefore T-bill cvash price, Y, is 98.5 or $985
2. 5/1.061 + 5/1.062 + 5/1.063 + 105/1.064 = 96.53 that is $965.30
3. Modified duration of Bond XYZ is 3.71 modified duration = 3.71/1.06= 3.49
4.
Accrued interest is therefore (78/180) * $35 = $15.17 Cost = 1020 + 15.17 = $1035.17
6. If rates increase by 200Bp, the value of the portfolio will decrease. Using duration and convexity, the value of each bond would be :
Tbill would decrease by 0.02 x 0.5= 1% using duration and ½ * 7 * 0.022 =
another way to derive the answer would be to calculate the convexity of the overall portfolio that is :
0.125 x 7 + 0.25 x 52 + 0.625 x 21 = 27
and then derive the percent age change of the prtfolio using both duratin and convexity :
4.37 x (-0.02) = -8.76% 27 x ½ x (0.02)2 = 0.54%
7. Dollar duration of Bond ABC = 100 000 000 x 0.085 = 8,670,000 Duration of Bond XYZ is 3.49 (see above)
MDXYZ
Students finding an approximate measure , depending on duration calculation ( or use of modified duration) close to this number will get full credit.
8. Fixed leg : 3/(1+0.05)3/12 + 3/(1+0.05)9/12 + 3/(1+0.05)15/12 + 103/(1+0.05)21/12
= 103.24
Floating leg : (100 + 5.5+0.9)/(1 + 0.05)6/12 = 103.83
DB is paying Libor and receiving fixed so its net position from this swap is : 103.24 - 103.83 = -$0.59 million
9. DB runs the risk of having Sahan Bank default on its swap. SB is net debtor on the swap but keep in mind that its risk lays with the investment bank it’s doing business with.
10.
FIXED FLOATING
SAHAN BANK 9% Libor + 0.9%
DEUTSCHE BANK 6% Libor + 0.4%
SB has a comparative advantage in floating rates as the difference in floating rate (0.5%)between the 2 banks is less important than the difference in the fixed rates (3%).
11. Difference between 9% - 6% = 3% and Libor + 0.9% - Libor + 0.4% = 0.5%
That is 2.5% - 0.3% (fees) = 2.2% 2.2%/2 =1.1%
SB will borrow fixed at 7.9% (that is 9% - 1.1%)
DB will borrow floating at Libor –0.7% (that is Libor+0.4% - 1.1%)
12. The minimum requested future value by the client is 25 (1+0.05)6 = 33.50 million
13. 33.50/(1+0.065)6 = $22.95 million
Safety cushion = 25 million - 22.95 million = $2.05 million
14. If rates decrease by 1% and the bond’s duration is 6, the bond should appreciate by 6% that is $1060. The 1-year interest on each bond provided by the coupon is $120