Question

1 questions, 5 small parts

A financial institution has the following market value balance sheet structure: Assets Cash Bond Liabilities and Equity $ 1,800 Certificate of deposit 1e, 200 Equity $12,000 Total liabilities and equity $10,800 1,200 $12,00 Total assets a. The bond has a 10-year maturity, a fixed-rate coupon of 11 percent paid at the end of each year, and a par value of $10.200. The certificate of deposit has a 1-year maturity and a 6 percent fixed rate of interest. The Fl expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense) b. If at the end of year 1 market interest rates have increased 100 basis points (1 percent), what will be the net interest income for the second year? Is the change in NII caused by reinvestment risk or refinancing risk? C. Assuming that market interest rates increase 1 percent, the bond will have a value of $9,657 at the end of year 1. What will be the market value of the equity for the FI? Assume that all of the Nil in part (a) is used to cover operating expenses or is distributed as dividends d. If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1.2002 e. What factors have caused the changes in operating performance and market value for this FI? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Required E The bond has a 10-year maturity, a fixed-rate coupon of 11 percent paid at the end of each year, and a par value of $10,200. The certificate of deposit has a 1-year maturity and a 6 percent fixed rate of interest. The FI expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.) Show less Net interest income (NIT) Required B >

Answer 1

solution computation of net interest Income (NII) © Net Interest Income = Interest Income (-) Interest expense - (10.200 x 11%) -(10.200x67) = $11226-) 612 $510 ® computation of wet Interest Income = Interest Income (-) Interest expenre - (10.200 x 117.) - (10,200x7%) . = $1182(-) 714 - $408 muu uw w . the change in Net Interest Income caused by risk of re-financing. NII get's decline because the cost of financing increase with out the increase in the rate of earnings.

① computation of the bond will year I market value of the eauity, when have a value of 9,657 at the end Cash $ 1,800 10.000 certificate of deposit equity Bond $9657 $657 11,457 Total Assets Wu57 market value of eauity declined by to 86 57 due to lower market value of the bond the market value of the eauity would be higher because the value of the bond would be higher and the value of the CD would remain unchanged factors that have caused the changes in operating Performances and market value for this fI The drecause of ovet Interest oricomo due to increas of market rates by 100 basis Points & this oncreased in market rates ducreated Interest Income increased interest expense, and decreased the value of the fI's bonds, which in turn decreased the market value of the firm,