90.2K
Verified Solution
Link Copied!
9. A commercial bank invests in a loan with a current market value of $600,000 and a
maturity of 3 years. The bank partially funds the loan by issuing a zero coupon bond
with a maturity (principal) value of $450,000 and a duration of 3 years. The current
market rate is 7% and interest rates are expected to increase by 1%. Which of the
following statements is true?
(a) The current equity value of the position is $150,000 and if interest rates increase the
equity value will increase.
(b) The current equity value of the position is $232,666 and if interest rates increase the
equity value will increase.
(c) The current equity value of the position is $232,666 and if interest rates increase the
equity value will decrease.
(d) The current equity value of the position is $150,000 and if interest rates increase the
equity value will remain the same.
(e) None of the given answers. The current equity value of the position is $232,666 and if
interest rates increase the equity value will remain the same as the maturity gap is 0.
Answer & Explanation
Solved by verified expert
