A bank issued a $90 million 1-year note at 8 per cent add on annual interest (paying one coupon at the end of the year) and used the proceeds to fund a $100 million face value 2-year commercial loan at 10 per cent annual interest. Immediately after these transactions were (simultaneously) undertaken, all interest rates went up 150 basis points.

1. 1. Usethedurationmodeltoestimatethechangeinthevalueoftheloanduetotheincreaseintheinterestrate.
3. 2. Findtheexactchangeinthevalueoftheloanusingthevaluationformula.
5. 3. Contrast the results obtained in (A) and (B). There is obviously a difference in the results. Explain what makes this difference and show how the difference can be

corrected. Show all workings and calculations.