BANKING AND FINANCIAL ASSIGNMENT

Round all answer to four decimal place

1. What is the price of each of Port Adelaide's corporate bonds? (Calculate the price based on the current yield for the corporate bonds, but as at the date the most recent coupon payment was made prior to today's date - the date in Box D in Part 4. For example, if the yield on these bonds is currently 2.5%, and the last coupon payment was on 21 March 2016, what would the price have been on 21 March at a yield of 2.5% p.a.?)

2. What is the duration of Port Adelaide's corporate bonds?

3. What is the price of each of Port Adelaide's Treasury bonds? (Assume a face value for each bond of $100. Calculate the price in the same manner as described above - based on the current yield, but as at the last date a coupon payment was made prior to today's date - the date on Box B in Part 4.)

4. What is the duration of Port Adelaide's Treasury bonds?

5. If the yield on the corporate bonds were to decrease by 1 basis point:

(a) Recalculate the price of the corporate bonds.

(b) What is the actual change in price of the corporate bonds for a 1 basis point decrease in yield (i.e. the percentage change in price between Boxes Box Q and Box U)? (Include a negative sign if the value is negative.)

(c) What is the estimated change in price of the corporate bonds (based on duration) for a 1 basis point decrease in yield? (Include a negative sign if the value is negative.)

(d) Compare the actual and estimated changes in price (the values in Boxes Box V and Box W). What would you conclude from this about the usefulness of duration in estimating the change in the price of a bond with a short duration for small changes in yield?

6. If the yield on the Treasury bonds were to decrease by 1 basis point:

(a) Recalculate the price of the Treasury bonds.

(b) What is the actual change in price of the Treasury bonds for a 1 basis point decrease in yield (i.e. the percentage change in price between Boxes Box S and Box Y)? (Include a negative sign if the value is negative.)

(c) What is the estimated change in price of the Treasury bonds (based on duration) for a 1 basis point decrease in yield? (Include a negative sign if the value is negative.)

(d) Compare the actual changes in price for bonds with short and long durations (the values in Boxes Box V and Box Z). What would you conclude from this about the interest-rate sensitivity of bonds based on their duration?

7. If the yield on the Treasury bonds were to decrease by 1%:

(a) Recalculate the price of the Treasury bonds.

(b) What is the actual change in price of the Treasury bonds for a 1% decrease in yield (i.e. the percentage change in price between Boxes Box S and Box AC)? (Include a negative sign if the value is negative.)

(c) What is the estimated change in price of the Treasury bonds (based on duration) for a 1% decrease in yield? (Include a negative sign if the value is negative.)

(d) Compare the differences between the actual and estimated changes in price for small and large changes in yield (i.e. compare the values in Boxes Box Z and Box AA and the values in Boxes Box AD and Box AE). What would you conclude from this about the usefulness of duration in estimating the change in the price of a bond for large changes in yield? Why is this case?

8. What is the weighted average duration of Port Adelaide's assets (round to 2 decimal places)?

9. What is the weighted average duration of Port Adelaide's liabilities (round to 2 decimal places)?

10. What is Port Adelaide's duration gap (round to 2 decimal places)?

11. What will be the estimated change in Port Adelaide's equity resulting from a 1 basis point increase in interest rates? (Use the yield on the bank's Treasury bonds as the starting interest rate in the calculation. Include the correct sign.)

12. Based on your answer to Question 11, what change in interest rates - an increase or a decrease - is something that Port Adelaide would be disadvantaged by? Explain why. (You will develop risk management strategies in Part 7 based on your answer to this question.)

Based on your answer to Question 12, you are to design interest rate risk management strategies using the following derivatives.

FORWARD RATE AGREEMENTS

You decide the bank should enter into a 6 x 12 FRA, based on the appropriate BBSW (given the borrowing period implied by the FRA), with an agreed rate of 2.58%, and with a notional principal of $1 million.

13. Would you be the buyer or seller of the FRA?

14. If you enter into this FRA on the date shown in Box J of Part 4, on what date will settlement take place?

15. If you enter into this FRA, what is the length of the borrowing period?

16. If the appropriate BBSW on the settlement date is 2.11%, how much compensation will be payable under the FRA?

17. Will you pay or receive this compensation?

FUTURES

You decide the bank should hedge interest rate risk using 3-year ASX Treasury Bond futures contracts.

18. Would you buy or sell futures contracts?

19. What is the interest rate implied by the quote you have shown in Part 4 for these contracs?

20. Suppose you buy or sell 10 contracts at the quoted price. What is the total value of these contracts?

21. If you close out your futures position at a quoted price of 98.23, what is the total value of these contracts?

22. Would you have made a profit or loss from your futures position?

23. What would your result have been?

OPTIONS

You decide the bank should hedge interest rate risk using either a cap or a floor, based on the 6-month BBSW, with semi-annual reset dates and a notional principal of $1 million.

24. Would you use a cap or a floor?

Suppose the 6-month BBSW has the following values on the following dates:

1/1/18   2.11%    1/1/19   2.56%    1/1/20   2.10%

1/7/18   2.57%    1/7/19   2.31%    1/7/20   2.33%

25. What will be the payoff on 1/7/18?

SWAPS

You decide the bank should hedge interest rate risk using a plain vanilla swap, with a fixed rate of 2.94% and quarterly reset dates, based on the BBSW, and with a notional principal of $1 million.

26. Would you be the fixed rate payer or the floating rate payer under the swap?

27. One year from now the BBSW is 2.99%. What is the net amount that will be payable under the swap for that quarter?

28. Would you pay or receive this amount?

Attachment:- Assignment Files.rar