Bank A has assets composed solely of a 14-year, zero-coupon bond with a current
value of $1,000,000 and a maturity value of $1,800,000. It is financed by a 12-year, 9%
coupon, $1,000,000 face value bond to yield 9.5% return.
Bank B has assets composed solely of a 14-year, 10% coupon, $1.7 million bond with a
11% yield to maturity. It is financed with a 16-year, zero-coupon bond with a current
value of $1,500,000 and a maturity value of $3,100,000.
All securities, accept the zero-coupon bond, pay interest semi-annually and the zero-
coupon bond has semi-annual compounding period. Suppose that interest rates are
expected to rise by 0.75% (75 basis points).
a) How do the values of the assets and liabilities of each bank change with changes inthe interest rate?
