Explanation

B is correct. The TSAA increases by the face value of the bonds, or GBP 20 million, as this is the amount that the bank will receive upon maturity.

The TSECF decreases by the actual amount of the outgoing cash flow. Since this is a 7-month time period, this also includes the first semi-annual coupon payment on the bond. Therefore, the TSECF over a 7-month horizon equals the sum of the following:

• Purchase price: GBP 20 million × 1.02 = GBP -20,400,000 (outflow)
• Coupon received: GBP 20 million × (8%/2) = GBP 800,000 (inflow)
• The sum is GBP -19,600,000, and therefore the TSECF decreases by that amount.

Why other options are incorrect:

• A is incorrect: This only decreases the TSECF by par value of the bond while ignoring the 6-month coupon payment and uses the full purchase price rather than the notional value for calculation of the TSAA.
• C is incorrect: The calculation amounts for both TSECF and TSAA are correct but the directions of their impacts are incorrect.
• D is incorrect: This does not include the incoming coupon payments towards TSECF and uses the full purchase price rather than the notional value for TSAA.

Key Concepts:

• TSAA (Term Structure of Available Assets): Increases by the face value of bonds purchased (GBP 20 million)
• TSECF (Term Structure of Expected Cash Flows): Decreases by net cash outflow (purchase price minus coupon received)
• 7-month horizon: Captures both the initial purchase outflow and the first semi-annual coupon inflow