City bank has six-year zero coupon bonds with a total face value of $20 million. The...

City bank has six-year zero coupon bonds with a total face value of $20 million. The current market yield on the bonds is 10 percent. Suppose that during last year the mean change in daily yields on six-year zero-coupon bonds was 25 basis points, while the standard deviation was 30 basis points. Yield changes are assumed to be normally distributed (critical value = 1.96 for 95% confidence interval)

Question: Continue from #1, what is the daily earnings at risk (DEAR) of this bond portfolio?

	A.	$667,284.95
	B.	$517,263,38
	C.	$916,363.63
	D.	$246,110.63
	E.	$749,021.12

Solutions

Expert Solution

Daily earnings at risk (DEAR) of this bond portfolio
=20/1.1^6*6/1.1*(0.25%+1.96*0.30%)*10^6
=517263.38

jeff jeffy answered 1 year ago

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