Question: Use the information in the table to answer the questions that follow. Cash $50 Deposit D1 (3 years, 3%) $200 Loan L1 (6 years, 5%)

Use the information in the table to answer the questions that follow.

Cash $50 Deposit D1 (3 years, 3%) $200
Loan L1 (6 years, 5%) $200 Equity $50
Total Assets $250 Total Liabilities $250
  1. Estimate the duration of Loan L1 and Deposit D1.
  2. Using the duration formula estimate the change in the value of the equity if interest rates are expected to increase by 2%.
  3. Estimate the convexity of Loan L1.
  4. Using the duration plus convexity formula estimate the change in the value of Loan L1 if interest rates are expected to increase by 2%. (There is no need to estimate the convexity of deposit D1.)

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