The following is a simplified FI balance sheet:

Assets Liabilities and Equity Loans $1,000 Deposits $ 850 Equity 150 Total assets $1,000 Total liabilities and equity $1,000 The average maturity of loans is four years and the average maturity of deposits is two years. Assume that loan and deposit balances are reported as book value, zero-coupon items.

a. Assume that the interest rate on both loans and deposits is 9 percent. What is the market value of equity?

b. What must be the interest rate on deposits to force the market value of equity to be zero? What economic market conditions must exist to make this situation possible?

c. Assume that the interest rate on both loans and deposits is 9 percent. What must be the average maturity of deposits for the market value of equity to be zero?