Question

Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 13.25 percent coupon, $2.7 million loan with a 13.25 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.7 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 13.25 percent, zero-coupon bond with a current value of $2,285,241.72 and a maturity value of $5,460,087.71. It is financed by a 10-year, 7.50 percent coupon, $2,700,000 face value CD with a yield to maturity of 10 percent. All securities except the zero-coupon bond pay interest annually. a. If interest rates rise by 1 percent (100 basis points), what is the difference in the value of the assets and liabilities of each bank? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) Asset Value Liabilities Value Before Interest Rise After Interest Rise Difference Before Interest Rise After Interest Rise Difference Bank 1 Bank 2

Answer 1

Answer Page: No @ Difference the value of the assets and liabilities of each bania of interest rate vise tiny 1 % (10 basis point.):- Ами : UA Bankt Bank ! :- Assets Pet = 2700,000 X 13°225). = $357750 Market value of assets after interests vise = pu(Rabe , nipur, pembo, Fv) + PUCCB-95 %+ !), 10718, 354450,870,co) = PU (14,25 %., 10, 358456, 9400,000) = $2560598.25 (from financial aku tady Market value of assets before interest vise = pv ſ vate; mper, proti, Fy) = PV(13.254., 10, 357450, s terord 5. $2400,000 fem ficaria cald) Difference - 2560598.25 - 2700,000 = - $139441. 45

③ Page No Liabilities PMT = Annual interest corporis - $ 2700,000 X 10 % = $ $ 40,000 Market value of liabilities after interest ise = Puſtite, oper, pot, rv) = PV(102-419.) , toys, 974ce, a tengerd E PV (U %, 10yrs ,940,000, 9700,000) = $ 2540990.74 (from financial cataly Market value of liabilities bebore interest rise = pv / rate, npur, pont, Fv) E pv (104 10,240,600, 2100.000) $2400,000 for financial audio Difference = 9540990.94 - 9400,000 --$159009.26

Page No ③ Bank a Assets niper - 4 yeari8 FVE 54 60,08 77 Market rate abter inbegrests rise 3 pu(Rate, nper, pet, FV) = pv (13-25% +1%), 7yro, 0, 5460,0877) = pv (14.254, 57,0, 5460087.41) = $2148850.38 (-fio financial catuleb FV = 5460,087171 PVC $2285241.42 aper & years Rabe; or Rate (7,0, -2285241.40, 5460087.71) = 13,95%. Market vrate of assets bebore interest xist - $228524), 72 Difference 3 2148850.28 - 0285941.72 =-$136391144

Page No 4 Liabilities PMI = 0400,000 X 7.50 % = $202500 Market ovaté of liabilities alber interest vise = puſ Reite', nper, prot, py) = pu[C187.%), 10, 302500, 310:00) = PVE 11%, 10, 802500, 2 700,000) = $2143467.54 (chemi financial calukt Market orate of liabilities bebore intereif vise = px (10%., 10, JoacC, 2400,000) - $ 2285241.79 (from financial ("calculator nce 2143467.57-2285241: 72 ==$141974.15 Asset value . liabilities value Bebove interest after interest oifference Bebore intereak After interest Difference Yibe v ise Vibe Vio Bank! 256052825 2700,000. - 139470375) 25409901740400,000 - 159609.26 Bank 22148850-28 228524172 – 136391.44 2143469057 2285241.72 - 14/774.15