1. A financial institution has the following market value balance sheet structure:

The bond has a 10-year maturity and a fixed-rate coupon of 10 per cent. The certificate of deposit has a one-year maturity and a 6 per cent fixed rate of interest. The FI expects no additional asset growth.
What will be the net interest income at the end of the first year? (Note: Net interest income equals interest income minus interest expense.)
If at the end of year one market interest rates have increased 100 basis points (1 per cent), what will be the net interest income for the second year?
Is this result caused by reinvestment risk or refinancing risk?
Assuming that market interest rates increase 1 per cent, the bond will have a value of $9446 at the end of year one. What will be the market value of equity for the FI?
If market interest rates had decreased 100 basis points by the end of year one, would the market value of equity be higher or lower than $1000?
Why?
What factors have caused the changes in operating performance and market value for this firm? LO 4.1

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Cashi Bond Total assets Assets $1000 Certificate of deposit 10 000 Equity $11000 Total liabilities and equity Liabilities and equity $10.000 1.000 $11,000