Question

Consider the following two banks:

Bank 1 has assets composed solely of a 10-year, 11.75 percent coupon, $2.1 million loan with a 11.75 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.1 million CD with a 10 percent yield to maturity.

Bank 2 has assets composed solely of a 7-year, 11.75 percent, zero-coupon bond with a current value of $2,229,035.91 and a maturity value of $4,851,206.79. It is financed by a 10-year, 11.00 percent coupon, $2,100,000 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

The value of assets and liabilities after interest changes can be find using PV function in excel

PV(rate, nper, pmt, [fv])

Rate    Required. The interest rate per period. Market Yield

Nper    Required. The total number of payment periods in an annuity. Life of the asset or liability

Pmt    Required. The payment made each period and cannot change over the life of the annuity. Interest Amount

Fv    Optional. The future value, or a cash balance you want to attain after the last payment is made. Maturity Value of the asset or liability

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