**Volatility with time horizon & Bond Value****Ex.1**

If daily volatility of a Security is 2%, how much will be monthly volatility?

Solution

Monthly volatility = Daily Volatility * ∫30 = 2*∫30 = 2*5.477 = **10.95%**

**Ex.2**

If per annum volatility is 30% and nos. of trading days per annum be 250, how much will be daily volatility?

Solution

Annual Volatility = Daily Volatility * ∫250 = Daily Volatility * 15.81

30 = Daily Volatility *15.81

Daily volatility = 30/15.81 = **1.90%**

**Ex.3**

If 1 day VaR of a portfolio is Rs. 50000/- with 97% confidence level. In a period of 1 year of 300 trading days, how many times the loss on the portfolio may exceed Rs. 50000/-.

Solution

97% confidence level means loss may exceed the given level (50000)on 3 days out of 100.

If out of 100 days loss exceeds the given level on days =3

Then out of 300 days, loss exceeds the given level = 3/100*300 =**9 days.**

**Ex.4**

A 5 year 5% Bond has a BPV of Rs. 50/-, how much the bond will gain or lose due to increase in the yield of bond by 2 bps

Solution

Increase in yield will affect the bond adversely and the bond will lose.

Since BPV of the bond is Rs. 50/-. Increase in yield by 2 bps will result into loss of value of Bond by 50*2=100.

**Ex.5**

1 day VaR of a portfolio is Rs. 50000/- with 90% confidence level. In a period of 1 year (250 days) how many times the loss on the portfolio may not exceed Rs.50000/-

Ans. 90% confidence level means on 10 days out of 100, the loss will be more than Rs. 50000/-.

Out of 250 days, loss will be more than 50000/- on **25 days Ans**.

**Bond Value, Current Yield**

Bond-1 Bond-2

Face Value 100 100

Annual Coupon 8% 10%

Term to Maturity 3 yrs 4 yrs

Market Price 80 90

**Ex. 1 **Find Current Yield of Bond 2

Solution

Coupon amount X100 = 10/90*100 = 11.11%

Market Value

**Ex. 2 **Find YTM of Bond 1 & 2

YTM of Bond 1 = 17.07%

YTM of Bond 2 = 13.41%

**Ex. 3 **Find McCauley Duration of Bond 1

2.76 years

**Ex. 4**

Find Modified Duration of Bond 2

Solution

McCauley duration/1+yield

=3.46/(1+13.41%) = 3.46/1.1341 = 3.05 yrs.

**Ex. 5 **What is %age change in price of Bond 2 if YTM increases by 1%

Expected %age change in price

=Modified Duration x %age change in yield

=3.5 x 1 = -3.05% (Decrease in price of bond)

**Ex. 5 **What is %age change in price of Bond 2 if YTM decreases by 1%

=3.5 x 1 = 3.05% (Increase in price of bond)

**Ex.6 **As an investor, in which bond would you like to invest.

Bond 1 (YTM is more)

**AMA – Estimated level of Operational Risk and Impact of Internal Control**

**Question: **Probability of Occurrence : 4

Potential Financial impact =4

Impact of Internal controls = 0%**Solution:**

{ Probability of occurrence x Potential financial impact x Impact of internal controls } ^0.5

=(4x4) ^0.5 = ∫16 = **4 Ans**.(**High Risk**)

CAIIB Paper 1 Study Material |

CAIIB Paper 2 Study Material |

CAIIB Paper 3 Study Material |