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KNP Ltd is an Australian general insurance firm. As a risk management consultant, you have been appointed to provide advice for KNP Ltd. An

 

KNP Ltd is an Australian general insurance firm. As a risk management consultant, you have been appointed to provide advice for KNP Ltd. An extract from the balance sheet of this financial institution is shown below. Variable rate market yields are indicated in parentheses. Assets Commercial bills (2.5%) Corporate bonds (3%) Total assets Liabilities Long-term liabilities (4%) Total liabilities Equity $ millions 15 40 55 40 40 20 Duration 7.5 2.0 8.5 Required: If you believe there will be a general change in interest rates from 5% p.a. to 4% p.a., what impact will this have on both the net interest income and value of the equity of KNP Ltd? Briefly explain your answer. Show all working. Use dot points where necessary.

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