Question

Consider the following two banks:

Bank 1 has assets composed solely of a 10-year, 12.25 percent coupon, $2.3 million loan with a 12.25 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.3 million CD with a 10 percent yield to maturity.

Bank 2 has assets composed solely of a 7-year, 12.25 percent, zero-coupon bond with a current value of $1,946,687.39 and a maturity value of $4,371,199.86. It is financed by a 10-year, 7.50 percent coupon, $2,300,000 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 the blank！

Answer 1

The present value of loans are the respective value of assets and liabilities.

It is found using the PV function in MS Excel.