FIN 352 (1) Essay Example | Topics and Well Written Essays - 500 words

FIN 352 (1) - Essay Example One of the major OBS activities is the issuance of guarantees. This may be called by a bank to take place at a future time, and the dedication to lend at a forthcoming time if the borrower wishes. This may prompt the result of a contingent risk which may be out of the control of the financial institution. A duration of a zero-coupon bond is a bond that does not pay any interest in its maturity life. That is; its maturity is equivalent to maturity because hundred percent of its present value is made by the payment of the nominal value at maturity (Lee & Alice 316). The relationship that exists between duration and maturity in bonds is that the longer a bond takes to mature, the greater is its duration or volatility. Duration changes each time a bond makes a coupon installment. After some time, it abbreviates as the bond nears maturity. Elsewhere, the relationship between duration and yield is that the higher a bond yields as it nears maturity, the lesser is its duration. This is because the present value of the inaccessible cash flows gets to be dominated by the value of the closer installments. Also, the relationship between duration and interest rates is that the higher a coupon bond is, the more interest it generates and vice versa. The financial significance of duration is the mea sure of a bond’s correspondence to the interest changes in the economy. Value at risk is method used to quantify and measure the level of financial related vulnerability inside an association over a determined duration. Its approach to the market risk is based on measuring three variables that are the level of potential risk, the probability amount of the specified level of risk and the time frame. Value at risk is closely related with the normal distribution. It measures portfolio risk along the normal distribution curve. The curve was developed by Carl Friedrich Gauss hence the name