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Case study on Macaulay duration
Face Value of Security Rs. 100
coupon rate 8% biannually
Maturity 4 year
YTM 10%
Calculate
01. Maculay Duration in half yearly
02. Maculay duration in years
03. Modified duration
.............................................
Calculation of Economic Value of Equity
Net Worth = 1350.00
Risk Sensitive Asset (RSA) = 18251.00
Risk Sensitive Liability (RSL) = 18590.00
Weight Modified Duration of Asset (DA) = 1.96
Weight Modified Duration of Liability (DL) = 1.25
01. What is Weight (W)?
a. 1
b. 1.02
c. 1.33
d. 1.66
Ans - b
Solution:
Calculate weight (W) = RSL/RSA
=18590/18251
=1.018
=1.02
.............................................
02. What is DGAP?
a. 0.33
b. 0.48
c. 0.69
d. 0.81
Ans - c
Solution
DGAP (modified duration gap) = DA - (W*DL)
= 1.96 - (1.02*1.25)
= 1.96 - 1.1275
= 0.685
= 0.69
.............................................
03. What is Leverage Ratio?
a. 12.33
b. 13.22
c. 13.52
d. 13.66
Ans - c
Solution
Leverage ratio= RSA/ Networth
= 18251/1350
= 13.52
.............................................
04. What is Modified Duration of Equity?
a. 6.33
b. 7.33
c. 8.33
d. 9.33
Ans - d
Solution:
Modified duration of equity (MD) = DGAP * leverage ratio
= 0.69 * 13.52
= 9.3288
= 9.33 years
.............................................
05. If there is 200 bp change in Rate what is drop in Equity Value?
a. 18.66
b. 20.33
c. 22.66
d. 24.33
Ans - a
Solution
Equity value=Change in rate (BP)*MD
=200*9.33/100
=18.6576
=18.66%
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