Financial Services (Investment and Fiduciary Services)
FINANCIAL SERVICES (CAPITAL ADEQUACY OF INVESTMENT
FIRMS) REGULATIONS 2007 27. Under a system referred to in paragraph 26 an investment firm shall take the market value of each fixed-rate debt instrument and thence calculate its yield to maturity, which is implied discount rate for that instrument. In the case of floating rate instruments, the investment firm shall take the market value of each instrument and thence calculate its yield on the assumption that the principal is due when the interest rate can next be changed.
28. The investment firm shall then calculate the modified duration of each debt instrument on the basis of the following formula: modified duration = ((duration (D))/(1 + r)), where–
/ ( ) ) r ) ) / ( ( 1 C t ( 1 ( ( D t t m t
1m (Ct ) /((1 r)t )))
R = yield to maturity (see paragraph 25), Ct = cash payment in time t, M= total maturity (see paragraph 25).
29. The investment firm shall then allocate each debt instrument to the appropriate zone in Table 3. It shall do so on the basis of the modified duration of each instrument.
Modified duration (in years)
Assumed interest (change
> 0 ≤ 1.0
> 1.0 ≤ 3.6
30. The investment firm shall then calculate the duration-weighted position for each instrument by multiplying its market price by its modified duration and by the assumed interest-rate change for an instrument with that particular modified duration (see column 3 in Table 3).
31. The investment firm shall calculate its duration-weighted long and its duration-weighted short positions within each zone. The amount of the
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Repealed Subsidiary 2007/002