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After one year, on March 1, 2023, the spot rate curve has risen +6% across all maturities, so that the new spot rate curve
After one year, on March 1, 2023, the spot rate curve has risen +6% across all maturities, so that the new spot rate curve is as follows: YEAR 1 2 3 4 LO 5 SPOT RATE % 11.25 11.50 11.75 12.00 12.25 Note that the U.S. Treasury bond that SVB purchased on March 1, 2022 pays its first coupon to SVB on March 1, 2023, and then has 4 years and 4 coupon payments remaining until its maturity on March 1, 2027. The U.S. Treasury bond price on on March 1, 2023 is determined by the spot rate curve given above and the bond's remaining cash flows. On on March 1, 2023, there is a run on SVB and clients seek to immediately withdraw $180 billion. SVB receives the first coupon payment of the bond it holds in cash, and the sells all of their U.S. Treasury bond immediately to generate more cash. After this, SVB still does not have enough cash to meet the $180 billion of clients' withdrawal requests. How much bailout money does SVB need to obtain from the Fed to exactly meet the $180 billion in withdrawal requests and avoid failure? A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may fail in the near future. When this happens the central banking system of the United States, The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) may intervene in an attempt to prevent widespread panic in the U.S. financial markets. Upon completion of Math 134A, you are hired by the Federal Reserve to investigate Silicon Valley Bank (SVB), a state-chartered commercial bank headquartered in Santa Clara, California. You learn that SVB had exactly $200 billion in cash deposits on March 1, 2022, and immediately invested the entire $200 billion in a 5-year 6% annual coupon U.S. Treasury bond with a price determined by the spot rate curve given below. Assume SVB paid zero percent interest to its depositors. On March 1, 2022, the spot rate curve was as follows: YEAR 1 2 3 4 LO 5 SPOT RATE % 5.25 5.50 5.75 6.00 6.25
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