Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 12.25 percent...

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！

Solutions

Expert Solution

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

It is found using the PV function in MS Excel.

jeff jeffy answered 1 year ago

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