Question: 2. Use the information in the table to answer the questions that follow. Cash $50 Deposit D2 (2 years, 5%) $520 Loan L2 (5 years,

2. Use the information in the table to answer the questions that follow. Cash $50 Deposit D2 (2 years, 5%) $520 Loan L2 (5 years, 10%) $500 Equity $30 Total Assets $550 Total Liabilities $550 a) Estimate the duration of Loan L2 and Deposit D2. b) Using the duration formula estimate the change in the value of the equity if interest rates are expected to decrease by three percent. c) Estimate the convexity of Loan L2. d) Using the duration plus convexity formula estimate the change in the value of Loan L2 if interest rates are expected to decrease by three percent. (There is no need to estimate the convexity of deposit D2.) 2. Use the information in the table to answer the questions that follow. Cash $50 Deposit D2 (2 years, 5%) $520 Loan L2 (5 years, 10%) $500 Equity $30 Total Assets $550 Total Liabilities $550 a) Estimate the duration of Loan L2 and Deposit D2. b) Using the duration formula estimate the change in the value of the equity if interest rates are expected to decrease by three percent. c) Estimate the convexity of Loan L2. d) Using the duration plus convexity formula estimate the change in the value of Loan L2 if interest rates are expected to decrease by three percent. (There is no need to estimate the convexity of deposit D2.)

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