Question
Metropolitan Bank has an obligation of $1,648,000 at the end of the second year and $1,795,000 at the end of the five years. It also
Metropolitan Bank has an obligation of $1,648,000 at the end of the second year and $1,795,000 at the end of the five years. It also has $3,000,000 to invest and can choose between a zero-coupon bond or a coupon bond. The coupon bond matures in five years, pays an annual coupon of $120,000 and has a balloon payment of $3,000,000. The zero-coupon bond has a balloon payment of approximately $3,650,000 at the end of the fifth year. The default-free yield on a one-year bond is 4%, and the annualized yield on a five-year bond is also 4%.
Assuming that this is only part of the banks balance sheet, what is the present value of the banks equity?
What will be the present value of the banks equity if the central bank increases the overnight rate by 75 basis points?
(Hint: Some information presented in the scenario is irrelevant in solving the problem. That is, the bank has not yet decided on its bond investment strategy.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started