Consider the following two banks Bank 1 has assets composed solely of a 10 year, 12 percent coupon, $ 1 million loan with a 12 percent yield to maturity It is financed with a 10 year, 10 percent coupon, $ 1 million CD with a 10 percent yield to maturity Bank 2 has assets composed solely of a 7 year...

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Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 12 percent coupon,

Question:

Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $ 1 million loan with a 12 percent yield to It is financed with a 10-year, 10 percent coupon, $ 1 million CD with a 10 percent yield to Bank 2 has assets composed solely of a 7-year, 12 percent, zero-coupon bond with a current value of $ 894,006.20 and a value of $ 1,976,362.88. It is financed with a 10-year, 8.275 percent coupon, $ 1,000,000 CD with a yield to of 10 percent. All securities except the zero-coupon bond pay interest annually.
a. If interest rates rise by 1 percent (100 basis points), how do the values of the assets and liabilities of each bank change?
b. What accounts for the differences between the two banks’ accounts?

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...