Financial Risk Manager Part 1
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An investment analyst is working on determining the forward rate bucket O1 for a specific bond in their portfolio. Here's the detailed information about the bond and the task at hand:
The bond in question offers a 5% annual coupon and has a nominal (face) value of CNY 100,000. It is scheduled to mature in three years.
Currently, the analyst is observing a flat forward rate curve, which stands at 3%. It's important to note that these forward rates are calculated on an annual basis. For the purposes of analysis, the forward rates have been divided into two specific maturity buckets: 0-2 years and 2-3 years.
Given these circumstances, the analyst needs to determine what the forward bucket O1 would be for this bond specifically in the 2-3 year maturity bucket, especially considering a hypothetical scenario where there is an increase in interest rates.
What would this forward bucket O1 be?
An investment analyst is working on determining the forward rate bucket O1 for a specific bond in their portfolio. Here's the detailed information about the bond and the task at hand:
The bond in question offers a 5% annual coupon and has a nominal (face) value of CNY 100,000. It is scheduled to mature in three years.
Currently, the analyst is observing a flat forward rate curve, which stands at 3%. It's important to note that these forward rates are calculated on an annual basis. For the purposes of analysis, the forward rates have been divided into two specific maturity buckets: 0-2 years and 2-3 years.
Given these circumstances, the analyst needs to determine what the forward bucket O1 would be for this bond specifically in the 2-3 year maturity bucket, especially considering a hypothetical scenario where there is an increase in interest rates.
What would this forward bucket O1 be?
Explanation:
A is correct. The current value of the bond is: 5,000，5,000，150,000 105,657.22 1.03 1.033 When forward rates in the 2-3 year forward bucket are increased by 1 bp, the value of the bond becomes: 5,000 5,000 105,000 105,647.89 1.03 1.031.03 1.031.03*1.0301 The forward bucket 01 is the difference between these values: 105,657.22- 105,647.89=CNY9.33