Calculate the duration of a risky corporate bond which pays coupon of 12.

5% semi-annually, with
100. Use discounting rate of 16%
f 12.5% semi-annually, with a maturity of 2 years. Face value of the bond is
Duration Bond
Coupon 8%
Years to maturity 3
Par value (Rs.) 1,000
Discounting rate 14%
Compute duration

If interest rate falls by 2%, compute % increase in price of the bond

Interest Sensitive Assets (Rs. Crore) 580
Interest Sensitive Liabilities (Rs. Crore) 765
Compute Gap
Comments?
If interest rates change from 5% to 5.75%, what is the impact on interest income?
If interest rates change from 5% to 4.75%, what is the impact on interest income?
 ABC bank issued Rs. 80 Million one year bond at a coupon of 9% payable annually. The proceeds were used to fund
Immediately after these transactions were simultaneously closed, all market interest rates increased by 1.5%.
1 What is the true market value of the asset and liability of the bank after the change in interest rates
2 How did this change impact the equity of the bank
3 What was the duration of the asset and liability at the time of issuance
4 What was the duration gap after the issuance of asset and liability
5 What was the leverage adjusted duration gap after the issuance of asset and liability
6 What is the expected change in value of the asset and liability for the predicted increase of 1.5% in interest rates
oceeds were used to fund Rs. 100 Million, two year commercial loan earning at 11% p.a.
s increased by 1.5%.

of 1.5% in interest rates

XYZ bank has the following. MT bonds are 6% coupon and semi annual, 5 years maturity
Amounts in Rs. Crore Duration
Assets
T bills 90 0.5
ST bonds 55 0.9
MT bonds 176 x
Loans 2,724 7
3,045
Liabilities
Deposits 2,092 1
Govt. Funds 238 0.01
Equity 715
3,045
What is the duration of MT bonds

What is the weighted duration or average duration of all liabilities

What is the weighted duration or average duration of all assets
What is duration gap
What is leverage adjusted duration gap
A financial institution has the following market value balance sheet structure:

Assets Rs. Crore Liabilities and equity Rs. Crore

Cash 1,000 Certificate of Deposits-1 Year 10,000
Bonds-10 Year 10,000 Demand Deposits 5,000
Loans-3 Years 5,000 Equity 1,000

Total 16,000 total 16,000

1 Compute weighted average maturity of liabilities

2 Compute weighted average maturity of assets
3 Compute maturity gap
A financial institution has the following market value balance sheet structure:

Assets Rs. Crores Liabilities and Equity

Cash 1,000 Certificate of Deposits-1 Year - 6% Fixed
Bonds-10 Year - 10% Fixed 10,000 Equity
Total 11,000 Total

1 NII at the end of first year

2 At the end of year 1, interest rates increase by 100 bps, compute NII for year 2
3 Is the change in NII caused by reinvestment risk or refinancing risk
4 If interest rates increase by 1% at the end of year 1, what is the market value of bonds, w
5 If market interest rates have decreased by 1%, what is the market value of bonds and va
 Rs. Crores
10,000
1,000
11,000

mpute NII for year 2

s the market value of bonds, what will be the value of equity assuming the value of CDs do not change
market value of bonds and value of equity, assuming CDs value do not change
A bank invested $50 million in a two-year asset paying 10 percent interest per year and simultaneously issued a $50 million
one-year liability paying 8 percent interest per year. The liability will be rolled over after one year at the current market rate
What will be the bank’s net interest income if at the end of the first year all interest rates have increased by 1 percent (100
basis points)?
aneously issued a $50 million,
ar at the current market rate.
increased by 1 percent (100
 An extract from ALM records of a banks is shown below -

Assets Rs. Crore Liabilities

1 Year Term
Deposits (6%
Floating Rate Mortgages (10% currently) 50 currently)

3 Year Term
Deposits (currently
30 Year Fixed Rate Loans (currently 7%) 50 7%)
Equity
Total 100 Total

1 What is expected net interest income at year-end?

2 What will net interest income be at year-end if interest rates rise by 2 percent?

3 What is total RSA, RSL and the income Gap or funding gap or repricing gap for a time period of one year

4 Using the funding gap computed above, find out change in net interest income if interest rates increase by 2%

What will net interest income be at year-end if interest rates on RSAs increase by 2 percent but interest rates on
5 Is it reasonable for changes in interest rates on RSAs and RSLs to differ? Why?
 Rs. Crore

70

20
10
100

me period of one year

nterest rates increase by 2%

percent but interest rates on RSLs increase by 1 percent?

 Rs. Crore
RSA 800
RSL 650
Duration of RSA 6.5 Years
Duration of RSL 3.5 Years

1. Compute Duration Gap

2. Interpret Duration gap

3. If interest rates on advances increase from 10% to 11% and interest rates on deposits increase from 6% to 7.5%what change
Compute the absolute changes in RSAs and RSLs and also percentage changes
om 6% to 7.5%what changes will happen to the values of RSA and RSL and Net worth or market value of the bank
Hero bank has 25 million govt bonds with duration of 4.5 yrs.
If interest rates increase from 6% to 6.8%, compute the percentage change in market value of bonds

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