The following is a simplified FI balance sheet:

Assets Loans $1,000 Total assets $1,000 Liabilities and Equity Deposits Equity $ 850 150 Total liabilities and equity $1,000 The average maturity of loans is four years and the average maturity of depos- its 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? LO.1