Question: An investment bank agrees to underwrite a 500 million
An investment bank agrees to underwrite a $ 500 million, 10-year, 8 percent semiannual bond issue for KDO Corporation on a firm commitment basis. The investment bank pays KDO on Thursday and plans to begin a public sale on Friday. What type of interest rate movement does the investment bank fear while holding these securities? If interest rates rise 0.05 percent, or five basis points, overnight, what will be the impact on the profits of the investment bank? What if the market interest rate falls five basis points?
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