CORPFIN 7040 Fixed Income Securities : Return on Equity

CORPFIN 7040 Fixed Income Securities : Return on Equity

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CORPFIN 7040 Fixed Income Securities

Questions:

In lectures, we discussed that if the maturity of assets exceeds the maturity of liabilities, then an increase (decrease) in interest rates will cause the value of assets to fall (rise) by more than the value of liabilities.

1 What is the interest rate on five-year loans issued by CBA?

2 What is the interest rate payable by CBA on one-year deposits?

3 What is the discount rate that you would use in cell B1 to do this valuation?

4 What do you think are the limitations of this spreadsheet model?

5 Can this model be used to find the market value of equity for CBA?

6 What is the value of liabilities for CBA?

7 What is the value of equity for CBA?

8 Explain why the duration of deposits is equal to 0 years in the table above.

9 Provide an example of how:

a. The duration of short-term certificates of deposit can be 0.4 years

b. The duration of long-term certificates of deposit can be 2.5 years

c. The duration of liquid securities can be 0.5 years

d. The duration of investments can be 3.5 years

e. The duration of fixed rate loans can be 2 years

10 Explain why floating rate loans have a low duration (0.5 years in the example above) even though the maturity of the floating rate loans could be very high (for example a 30-year floating rate home loan).

11 What is meant by the market value of equity?

12 What does it mean when the market value of equity is negative?

13 Give examples of shocks that might cause the market value of an FI to become negative (whereas it was positive before the shock)?

14 What factors could reduce the likelihood of an FI’s equity turning negative?

15 Explain what is meant by a negative return in this analysis?

16 Explain what is meant by a positive return in this analysis?

17 Comment on your results. What do the results suggest about which portfolio should be chosen?

a. Using your results (based on all simulations or selected simulations from your 50 simulations), explain how the treasury bond futures contract can be used for speculative purposes.

b. Using your results (based on all simulations or selected simulations from your 50 simulations), explain how the treasury bond futures contract can be used for hedging purposes.

CORPFIN 7040 Fixed Income Securities

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