QUESTION 6 (20 marks) a) Define the term Daily Earnings at Risk (DEAR) and describe the three (3) measurable components of DEAR. (8 marks) First Summit Bank has an inventory of AAA-rated, 15-year zero-coupon bonds with a face value of $600 million. These bonds are currently yielding 5.5 percent in the over-the- counter market. The historical mean change in daily yields is 0.0 percent and the standard deviation is 12 basis points. Calculate the modified duration of these bonds.
(2 marks) Calculate the price volatility of these bonds if the potential adverse move in yields is 25 basis points. (2 marks) Calculate the DEAR for First Summit Bank on its portfolio of bonds. (4 marks) Calculate the 10-day and 15-day Value-at-Risk (VAR) for First Summit Bank on its portfolio of bonds. (4 marks)
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