Question

Please help with "D" only... and please slow calculations as I want to learn, not just get answers ;=) .

Liabilities and Equity Assets 1,700 Certificate of deposit 10,100 Equity Cash $10,700 1,100 Bond $11,800 Total liabilities and equity $11,800 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 $10,100. 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 $9,562 at the end of year 1. What will be the market value of the equity for the FI? Assume that all of the NII in part (a) is used to cover operating expenses or is distributed as dividends. d. If market interest rates had decreased100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,100? 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 B Required C Required D Required A Required E 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 $1,100? (Negative amounts should be indicated by a minus sign.) because the value of the bond would be The market value of the equity would be and the value of the CD would remain unchanged

Answer 1

Solution :- The market value of the equity would be higher because the value of the bond would be higher and the value of the CD would remain unchanged

Now i explain very easily

If the Interest rates decrease in the market than the required rate of return of the persons also decreased as expectations based on market analysis

And we know the value of stock is calculated by sum of the present value of dividends and if required return decrease then automatically Present value Increase

As if Interest rate is 10% then present Value of $100 received after 1 year = 100 / ( 1 + 0.10) = 90.909

Now if interest rate is 20% then present value = 100 / ( 1 + 0.20) = 83.33

Similiarly If interest rate decrease then Present value increase means Price of Equity increase

IF there is any doubt please ask in comments