A financial institution has the folowing market value balance sheet structure: Liabilities and Equity Assets $ 2,600 Certificate of deposit 10,400 Equity $13,e0e Total liabilities and equity $11,600 1,40e $13,000 Cash Bond Total assets a. The bond has a 10-year maturity, a fixed-rate coupon of 12 percent paid at the end of each year, and a par value of $10,400. The certificate of deposit has a 1-year maturity and a 6 percent fixed rate of interest. The Fl expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note. Net interest incone 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 $9,866 at the end of year 1. What will be the market value of the equity for the FI? Assume that all of the NII in part (a) is used to cover operating expenses or is distributed as dividends. d. If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,400? e. What factors have caused the changes in operating performance and market value for this FI? Complete this question by entering your answers in the tabs below. ANSwer TS Comprete DUt Tot entrely correct. Complete this question by entering your answers in the tabs below. Required E Required A Required B Required C Required D If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,400? (Negative amounts should be indicated by a minus sign.) higher and the value of the CD would S (1,400) because the value of the bond would be romain unchanged The market value of the equity would be S 1,400 higher A financial institution has the folowing market value balance sheet structure: Liabilities and Equity Assets $ 2,600 Certificate of deposit 10,400 Equity $13,e0e Total liabilities and equity $11,600 1,40e $13,000 Cash Bond Total assets a. The bond has a 10-year maturity, a fixed-rate coupon of 12 percent paid at the end of each year, and a par value of $10,400. The certificate of deposit has a 1-year maturity and a 6 percent fixed rate of interest. The Fl expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note. Net interest incone 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 $9,866 at the end of year 1. What will be the market value of the equity for the FI? Assume that all of the NII in part (a) is used to cover operating expenses or is distributed as dividends. d. If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,400? e. What factors have caused the changes in operating performance and market value for this FI? Complete this question by entering your answers in the tabs below. ANSwer TS Comprete DUt Tot entrely correct. Complete this question by entering your answers in the tabs below. Required E Required A Required B Required C Required D If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,400? (Negative amounts should be indicated by a minus sign.) higher and the value of the CD would S (1,400) because the value of the bond would be romain unchanged The market value of the equity would be S 1,400 higher
