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 $$11,000\mathrm{.}00.$ The

certificate of deposit has a $1-$year maturity and a $5$ percent rate of interest. The FI expects no additional asset growth.

What will be the net interest income 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 this result caused by reinvestment risk or refinancing risk?

c$.$ Assuming that market interest rates increase $1$ percent, the bond will have a value of $$10,435\mathrm{.}52$ 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 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

$$1,000?$ Why?