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A financial institution invests in a zero-coupon bond with a maturity (principal)

value of $900,000 and a maturity of 2 years. The bond is partially funded

through a libility with a current market value of $475,000 and has a duration of

3 years. The current market rate is 7% and interest rates are expected to increase

by 1%. Which of the following statements is true?

(a) The current equity value of the position is $425,000 and if interest rates increase

the equity value will increase.

(b) The current equity value of the position is $311,095 and if interest rates increase

the equity value will decrease.

(c) The current equity value of the position is $311,095 and if interest rates increase

the equity value will increase.

(d) The current equity value of the position is $425,000 and if interest rates increase

the equity value will decrease.

(e) None of the given answers.