1. Tutorial. Measuring Interest Rate Risk
Repricing Model
Duration
SEEM 3580, 2016
YAN, Xing

2. Contents
A quick review
Some exercises
Excel

3. What is Interest Rate Risk?
Potential loss due to the fluctuation of interest rate
Faced by a financial institution
Because it may possess specific assets or liabilities, like bonds

4. 1. Repricing Model Applied to a balance sheet
Rate sensitive assets (RSA)
Rate sensitive liabilities (RSL)

5. 1. Repricing Model Assets or Liabilities: First repricing: cash
3-month U.S. Treasury bills
20-year U.S. Treasury bonds
30-year floating-rate mortgages with repricing every two years
30-year floating-rate mortgages with repricing every six months
Overnight fed funds
1-year fixed-rate CDs
5-year floating-rate CDs with annual repricing
Common stock

6. 1. Repricing Model Assets or Liabilities: First repricing: cash
3-month U.S. Treasury bills
20-year U.S. Treasury bonds
30-year floating-rate mortgages with repricing every two years
30-year floating-rate mortgages with repricing every six months
Overnight fed funds
1-year fixed-rate CDs
5-year floating-rate CDs with annual repricing
Common stock
N.A.
3 months
20 years
2 years
6 months
1 day
1 year

7. 1. Repricing Model Assets or Liabilities: First repricing: cash
3-month U.S. Treasury bills
20-year U.S. Treasury bonds
30-year floating-rate mortgages with repricing every two years
30-year floating-rate mortgages with repricing every six months
Overnight fed funds
1-year fixed-rate CDs
5-year floating-rate CDs with annual repricing
Common stock
N.A.
3 months
20 years
2 years
6 months
1 day
1 year
RSA/RSL (time period, e.g., [0, 1 year])

8. 1. Repricing Model Assets or Liabilities: First repricing: cash
3-month U.S. Treasury bills
20-year U.S. Treasury bonds
30-year floating-rate mortgages with repricing every two years
30-year floating-rate mortgages with repricing every six months
Overnight fed funds
1-year fixed-rate CDs
5-year floating-rate CDs with annual repricing
Common stock
N.A.
3 months
20 years
2 years
6 months
1 day
1 year
RSA/RSL (time period, e.g., [0, 1 year])

9. 1. Repricing Model Gap Analysis Formula:
Under unequal changes in interest rates:

10. 2. Duration Measure sensitivity of bond price to interest rate Bond:
time
1 year
2 year
3 year
Price (P)
Face Value ---- F
Annual Coupon Rate ---- c
Coupon Frequency ---- m (m=1,2,4)
Maturity ---- N years

11. 2. Duration If interest rate is R, what is the price P?
If R+∆R, what about P+∆P?
Remember the first order derivative:

12. 2. Duration
Formula of Duration:
Furthermore

13. 2. Duration
Formula of Duration:

14. 2. Duration Exercise： Calculate the duration (required, by hand)
Bond information:
Maturity 4
Coupon 8%
Yield (R) 10%
Frequency 2
FaceValue 1000

15. 2. Duration Exercise： Calculate the duration (required, by hand)
Bond information:
Need Excel?
Maturity 4
Coupon 8%
Yield (R) 10%
Frequency 2
FaceValue 1000

16. 3. Excel Some shortcuts without mouse: F2 ---- enter the editing mode
Esc ---- exit the editing mode
Shift (pressed) ---- select multiple cells
(can be used with Ctrl+C, Ctrl+V)

17. 3. Excel
Some functions:
IF(logical_expression, ture_do_this, false_do_this)
e.g., =IF(2+2>3,1,0)
=AND(____,____) =OR(____,____)
=SUM(B1:B8) =AVERAGE($C$3:$C$9)
$C$3 is absolute reference
C3 is relative reference (relative location, applied when you copy formula to a new cell)

18. http://support.office.com/ 3. Excel More help? Try: And search!
(Or google search!)

19. Thanks!
Q&A