Financial Risk Manager Part 2

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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 board. Therefore, the TSECF over a 7-month horizon equals the sum of the following:

Purchase price: GBP -20 million x 1.02, or GBP -20,400,000
Coupon received: GBP 20 million x (8%/2), or GBP 800,000

The sum is GBP -19,600,000, and therefore the TSECF decreases by that amount.

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.

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.

Purchase price: GBP -20 million x 1.02, or GBP -20,400,000
Coupon received: GBP 20 million x (8%/2), or GBP 800,000

The sum is GBP -19,600,000, and therefore the TSECF decreases by that amount.

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.

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Question A bank plans to purchase a newly issued 1-year bond with a face value of GBP 20 million. The bond has an annualized coupon rate of 8%, paid semi-annually, and is priced at 102% of par. A treasury analyst is asked to describe the impact of this purchase on the term structure of expected cash flows (TSECF) and the term structure of available assets (TSAA). Which of the following correctly describes the change in both the TSECF and the TSAA with a 7-month time horizon at the time the purchase is made?

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Last updated: July 5, 2026 at 07:29

The TSECF will decrease by GBP 20 million and the TSAA will increase by GBP 20.4 million.

The TSECF will decrease by GBP 19.6 million and the TSAA will increase by GBP 20 million.

The TSECF will increase by GBP 19.6 million and the TSAA will decrease by GBP 20 million.

The TSECF will increase by GBP 20 million and the TSAA will decrease by GBP 20.4 million.