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 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, 12 percent, zero-coupon bond with a current value of $ 894,006.20 and a maturity value of $ 1,976,362.88. It is financed with a 10-year, 8.275 percent coupon, $ 1,000,000 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), how do the values of the assets and liabilities of each bank change?
b. What accounts for the differences between the two banks’ accounts?



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  • CreatedJanuary 27, 2015
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