A financial institution has the following market value balance sheet structure: (LG 20-1) Assets Liabilities and Equity
Question:
A financial institution has the following market value balance sheet structure: (LG 20-1)
Assets Liabilities and Equity Cash $ 1,000 Certificate of deposit $10,000 Bond 10,000 Equity 1,000 Total assets $11,000 Total liabilities and equity $11,000
a. The bond has a 10-year maturity, a fixed-rate coupon of 10 percent paid at the end of each year, and a par value of $10,000. The certificate of deposit has a 1-year maturity and a 6 percent fixed rate of interest. The FI expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.)
b. If at the end of year 1 market interest rates have increased 100 basis points (1 percent), what will be the net interest income for the second year? Is the change in NII caused by reinvestment risk or refinancing risk?
c. Assuming that market interest rates increase 1 percent, the bond will have a value of $9,446 at the end of year
Step by Step Answer:
ISE Financial Markets And Institutions
ISBN: 9781265561437
8th International Edition
Authors: Anthony Saunders, Marcia Cornett, Otgo Erhemjamts