X hits on this document

Powerpoint document

MANAGING INTEREST RATE RISK: DURATION GAP AND MARKET VALUE OF EQUITY - page 37 / 39

88 views

0 shares

0 downloads

0 comments

37 / 39

Gap and DGAP management strategies: what are your bets?

Cash flows from investing $1,000 either in a 2-year security yielding 6 percent or two consecutive 1-year securities, with the current 1-year yield equal to 5.5 percent.

0       1   2 |-----------|-------------|

2-year security:----$60----|----$60----- $120 at 6% per yr

1-year security:----$55----|----- ? ------ $120 another 1-yr sec.

It is not known today what a 1-year security will yield in one year.

For the two consecutive 1-year securities to generate the same $120 in interest, ignoring compounding, the 1-year security must yield 6.5% one year from the present.

This break-even rate is a 1-year forward rate, one year from the present:

6% + 6% = 5.5% + ? with ? = 6.5 percent

Document info
Document views88
Page views88
Page last viewedMon Dec 05 18:47:42 UTC 2016
Pages39
Paragraphs367
Words2250

Comments