Question
Bank B has assets composed solely of a single loan. The loan promises to make annual interest payments of $8 million at the end of
Bank B has assets composed solely of a single loan. The loan promises to make annual interest payments of $8 million at the end of each of the first nine years and also pay $108 million at the end of the tenth year. The yield on this loan is currently 8 percent. (Note that this loan looks a lot like a bond.) The Banks liabilities are composed solely of a 1-year, $100 million face value certificate of deposit with a yield-to-maturity of 5.26 percent. a. (3 points) What is the market value of the banks equity? b. (5 points) If all interest rates (yields) increase by one percent, what will be the market value of the banks equity? c. (2 points) Describe the type of risk being demonstrated here.
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