MFIN7005 GROUP PROJECT 2

111 公式章 1 节 1
MFIN7005 GROUP PROJECT Ⅰ
MANAGING THE MARKET VALUE OF EQUITY FOR BANK

SEP, 2021

HKU official
Student Registered English Name
No. Session University I.D. Name (Class Name) Email Phone No.
1 A 3035889170 Lin Yudong Daniel [email protected] 64148762
2 A 3035882328 Wang Miao Chloe [email protected] 95794100
3 A 3035885069 Jin Qinmiao Joanna [email protected] 59620405
4 A 3035883384 Zhu Zeying Zoe [email protected] 63623219
5 A 3035881659 Yang Wenkang Kevin [email protected] 69971976
6 A 3035877309 Zhang Xinning Eva [email protected] 95878737
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1. Overview Table 3 Investing amount allowed by duration gap of

3.50 years
Shocked by the COVID-19 epidemic, the US
economy is ……（或许可以从宏观环境那里摘一小 HK$B US$B No. of Debts (B)
段补充一下）
Maximum Cash in A 103.75 13.30 0.13

After applying scenario analysis and calculating the Maximum Cash in B 479.10 61.42 0.61
relevant ratios, we are able to help manage the market
value of equity for the bank by suggesting to invest in Maximum Cash in C 187.29 24.01 0.17
the Treasury Debt A while keeping the duration gap
not higher than 3.50 years.
To avoid the duration gap being too high for the bank
to survive in this condition, we could only buy 0.13
During the whole analysis process, some crucial ratios
billion Debt A, 0.61 billion Debt B or 0.17 billion Debt
and results are listed below:
C exclusively.

Table 1 Current duration related ratios and scenario

Figure 1 Scenario Analysis Graph After taking 1 of 3
analysis result when net worth decreasing
debts

Duration gap of the bank Duration of the bank's assets

2.5292 4.0792

Duration of the bank's liabilities Duration of the bank's net worth

1.7714 20.2333

When net worth decreases from $300B to $200B:

Δnet worth Δr

-100 1.7002%

It is quite clear that current duration gap is about 1 year

less than the threshold value and allows us to invest
some cash into debts. After taking 1 of 3 debts, the relationship between the
net worth of bank and the change of interest rate is
From the perspective of net worth, it will cut down by showed above. More discussion will be given in the
100 HK$ billion if the interest rate will increase by Chapter 4.
1.7002% in the near future.
2. Analysis of the interest rate risk on the
Table 2 Interest Rate Risk Related Ratios of 3 debts
market value of equity for the bank
Treasury Debt A Treasury Debt B Treasury Debt C

Bond Price in D 100.89 101.07 141.98 Given the balance sheet of the bank, we are going to
calculate the duration of assets according to 12 :
Bond Price in HKD 786.97 788.34 1107.42

Duration (years) 22.46 4.86 12.44

Modified Duration(years) 22.25 4.84 12.35

212\*
Convexity 592.77 26.22 183.74 MERGEFORMAT (.)

Based on the ratios above, Treasury Debt B has an Assuming that duration of cash and of equipment are
advantage of lowest Duration and Modified Duration both 0 for they are insensitive to the interest rate risk,
while Treasury Debt A ranks first on the list of we calculated the duration of assets as 13 :
Convexity. Further discussion will be given in the later
chapter for the trade off among these 3 debts.
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between -0.5% and 3% with the interval of 0.5%. We
listed the results under different circumstances in % of
change in market value and change in market value
313\* respectively, as shown in Table 4 and Table 5.
MERGEFORMAT (.)
Table 5 change of market value for all the items with
Similarly, we calculated the duration of liabilities as duration when interest rate change
15 following 14 ：
-0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

Commercial Loan 7.59 0.00 -7.59 -15.19 -22.78 -30.38 -37.97 -45.57

414\* Mortgage Loan 34.79 0.00 -34.79 -69.58 -104.37 -139.16 -173.96 -208.75
MERGEFORMAT (.)
US Treasury Debts 5.46 0.00 -5.46 -10.92 -16.38 -21.84 -27.30 -32.75

Total Assets 47.84 0.00 -47.84 -95.69 -143.53 -191.38 -239.22 -287.07

Savings & Time Deposit 8.95 0.00 -8.95 -17.89 -26.84 -35.79 -44.73 -53.68
515\*
MERGEFORMAT (.)
Certificates of Deposit 9.49 0.00 -9.49 -18.98 -28.47 -37.96 -47.45 -56.95

Duration of net worth and duration gap showed in Total Liabilities 18.44 0.00 -18.44 -36.87 -55.31 -73.75 -92.19 -110.62
Table 1 are calculated following 16 and 17 :
Equity 29.41 0.00 -29.41 -58.81 -88.22 -117.63 -147.04 -176.44

In these 2 tables, we highlight the results for total

616\*
assets, total liabilities and equity in different colors.
MERGEFORMAT (.)
For further analysis, we drew the plot graph as Figure
2 and Figure 3.

Figure 2 change in market value of assets, liabilities and

equity
717\*
MERGEFORMAT (.)

Table 4 % of change of all the items with duration when

interest rate change

-0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

Commercial Loan 1.08% 0.00% -1.08% -2.17% -3.25% -4.34% -5.42% -6.51%

Mortgage Loan 5.80% 0.00% -5.80% -11.60% -17.40% -23.19% -28.99% -34.79%

US Treasury Debts 2.73% 0.00% -2.73% -5.46% -8.19% -10.92% -13.65% -16.38%

Total Assets 1.99% 0.00% -1.99% -3.99% -5.98% -7.97% -9.97% -11.96%

Savings & Time Deposit 0.60% 0.00% -0.60% -1.19% -1.79% -2.39% -2.98% -3.58%

Certificates of Deposit 1.58% 0.00% -1.58% -3.16% -4.75% -6.33% -7.91% -9.49%
Obviously, the change of interest rate and the market
value for the bank from different angles is negatively
Total Liabilities 0.88% 0.00% -0.88% -1.76% -2.63% -3.51% -4.39% -5.27% correlated with intercept around 0.

Equity 9.80% 0.00% -9.80% -19.60% -29.41% -39.21% -49.01% -58.81%

As we are trying to manage the market value of equity
for the bank, we give the trend formula of the
We then working on the scenario analysis with relationship between change in market value of equity
assumption that the interest rate will fluctuating and change of interest rate as 18:
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increase.

818\*
If the loan rate is not synchronized to increase, the
MERGEFORMAT (.)
increase in financing costs caused by the unilateral
increase in deposit rates can only be borne by the bank
Figure 3 % of change in market value of assets, itself.
liabilities and equity
c) Fierce competition among banks for funding
sources

After the interest rate rises, the gap in interest rate

levels among various financial institutions or financial
instruments has narrowed, and the spread between
deposits and loans has a tendency to narrow.
Therefore, the competition for deposits among banks
will become more intense.

d) The bank's debt burden has increased

We also gave the trend formula for the % of change in
market value of equity with interest rate increasing as When the scale of bank debt is large, rising interest
19 : rates will increase the interest that the bank needs to
pay and increase the debt burden.

e) Increased financial burden passed on by the

919\* government to banks
MERGEFORMAT (.)
For governments with excessive fiscal deficits, the
Using both 18 and 19, we could know that when the increase in interest rates will greatly increase the
interest rate rises by 1.7002%, the market value of interest burden on government debt, leading to a
equity for the bank will reduce from 300 HK$ billion further increase in government budget deficits.
to 200 HK$ billion without investing in none of 3 new Limited by the capacity of the government bond
debts. market, in order to make up for the fiscal deficit, the
government either compulsorily allocates low-interest
As above, a rise in interest rates will reduce the government bonds to the banks or borrows directly
market value of a bank's assets and liabilities, possibly from the banks, which further increases the financial
for several reasons: burden that the banks need to bear.

a) Adverse selection behavior of project 3. Analysis of 3 US Treasury debt securities

application
Before investing in any of securities, risk analysis
With the rise of real interest rates, enterprises will tend should be done, for three new debts A, B and C, we
to change the nature of their projects to make them calculated their interest risk related ratios according to
have higher risk and return levels in order to raise its basic information and an assumption that the
enough funds to pay higher interest rates. Therefore, calculations’ date basis is the “0” type in Microsoft
the increase of interest rate will reduce the quality of Excel.
assets, increase the credit risk, and the possibility of
asset losses is greater. Table 6 Risk Analysis for three new debts

b) Risk is concentrated in banks

After the increase of interest rate, if the bank chooses

to increase the loan interest rate along with the deposit
interest rate and pass the high interest rate on to the
enterprise, the profit level of the enterprise will
decrease, the debt scale will increase, the loan demand
will decrease, so the financing cost of the bank will
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Treasury Debt A Treasury Debt B Treasury Debt C Items Unit Value

Settlement 2021/1/1 2021/1/1 2021/1/1

Duration gap years 3.50
Maturity 2050/1/1 2026/1/1 2037/1/1
Duration liabilities years 1.77
Coupon 1.90% 1.20% 4.40%
Market Value of Liabilities HK$B 2,100.00
Yield 1.86% 0.98% 1.45%

Frequency 2 2 2 Market Value of Assets HK$B 2,400.00

Basis 0 0 0 New duration of assets years 5.05

Bond Price in D 100.89 101.07 141.99 Old duration of assets years 4.08
Bond Price in HKD 786.97 788.35 1107.52
ΔDuration assets years 0.97
Duration 22.46 4.87 12.45
Maximum Cash in A HK$B 103.73
Modified Duration 22.26 4.85 12.36
Maximum Cash in B HK$B 478.56
Modified Duration(METHOD 2) 22.26 4.85 12.36

Convexity 593.02 26.28 183.88 Maximum Cash in C HK$B 187.21

All the ratios useful is listed in the Table 6 and we will

compare the investment in any of these debts in
chapter 4, considering the situation and strategy for the Table 8
bank.

4. Analysis of interest rate risk on the market

value with new investment

Table 7

Figure 4

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 MFIN7005 GROUP PROJECT 2
Table 9

ΔA( with A) ΔA( with B) ΔA( with C) ΔL ΔE(with A) ΔE(with B) ΔE(with C)

-0.50% 59.39 59.44 59.41 18.44 40.95 41.00 40.97

0% 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.5% -59.39 -59.44 -59.41 -18.44 -40.95 -41.00 -40.97

1% -118.77 -118.88 -118.82 -36.87 -81.90 -82.00 -81.95

1.5% -178.16 -178.31 -178.23 -55.31 -122.85 -123.00 -122.92

2% -237.55 -237.75 -237.64 -73.75 -163.80 -164.00 -163.89

2.5% -296.94 -297.19 -297.05 -92.19 -204.75 -205.00 -204.87

3% -356.32 -356.63 -356.46 -110.62 -245.70 -246.00 -245.84

13113\* MERGEFORMAT (.)

10110\* MERGEFORMAT
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14114\* MERGEFORMAT
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11111\*
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15115\* MERGEFORMAT (.)

12112\* MERGEFORMAT Table 10

(.)
ΔNET WORTH ΔNET WORTH

Investing in Debt A -100.00 1.2210%

Investing in Debt B -100.00 1.2195%

Investing in Debt C -100.00 1.2203%

5. Suggestion of the new investment among 3

mutually exclusively bonds

Table 11

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 MFIN7005 GROUP PROJECT 2
%of Δmarket %of Δ market %of Δmarket
Δmarket value o f debt A Δ market value o f de bt B Δmarket value of debt C
value o f de bt A value of debt B value of debt C

- 0.50% 12.46 11.88 17.05 - 0.50% 11.13% 2.42% 6.18%

0% 0.00 0.00 0.00 0% 0.00% 0.00% 0.00%

0.5% - 10.91 - 11.56 - 15.83 0.5% - 11.13% - 2.42% - 6.18%

1% - 20.46 - 22.81 - 30.53 1% - 22.26% - 4.85% - 12.36%

1.5% - 28.85 - 33.76 - 44.19 1.5% - 33.38% - 7.27% - 18.53%

2% - 36.22 - 44.42 - 56.88 2% - 44.51% - 9.69% - 24.71%

2.5% - 42.70 - 54.80 - 68.69 2.5% - 55.64% - 12.11% - 30.89%

3% - 48.41 - 64.91 - 79.67 3% - 66.77% - 14.54% - 37.07%

Table 12

Table 15

Table 13

Table 16

Table 14

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