A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years.One-year maturity notes are currently priced at par and are paying 4.5 percent annually.Two-year maturity notes are currently priced at par and are paying 5 percent annually.The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield.

What is the forward one-year discount yield expected next year?

Question

What is the forward one-year discount yield expected next year?

Quizplus · Accepted Answer

Calculate 2-year spot discount yield: 100 = 5/1.045 + 105/(1 + d)2 F1F1F1S1F1F1F10 d = 5.01 percent.
To calculate the implied forward rate (1.05013)2 = (1.045)(1 + E(r))F1F1F1S1F1F1F10 E(r)= 5.53 percent.

A Bank with Total Assets of $271 Million and Equity