Question
A bank has the following interest-bearing assets and liabilities. The net annual interest (stated in terms of simple annual compounding) is given after each security
A bank has the following interest-bearing assets and liabilities. The net annual interest (stated in terms of simple annual compounding) is given after each security name. The mortgage, Coupon Bond, and CDs have fixed future cash-flows, whereas the Business Loan automatically adjusts based on the current federal funds rate. The bank is also borrowing on a daily rolling basis from other banks at the current federal funds rate. The current federal funds rate is 3%
| Assets | Value (millions) | Principle | Duration (in years) |
| Fixed Rate Mortgage (5%) | $70 | $70 | 6 |
| Adj. Business loans (Fed Funds + 3%) | $30 | $30 | 0 |
| Coupon Bonds (Coupon 4%) | $20 | $20 | 5 |
| Liabilities | |||
| Certificates of Deposit (non renewable, 3%) | $50 | $50 | 2 |
| Daily Borrowing from Money Market (fed funds rate) | $30 | $30 | 0 |
What is the new asset value of the Adjustable Business Loans?
What is the best estimate for the new book value of equity of the bank?
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Risk Sensitive Investment Management
Authors: Mark H A Davis, Sébastien Lleo
1st Edition
9814578037, 978-9814578035
