Question
National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. Assets Amount ($ millions) Annual
National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.
Assets | Amount ($ millions) | Annual Rate | Liabilities | Amount ($ millions) | Annual Rate |
1-year bonds | $60 | 7% | 1-year CD | $50 | 5% |
10-year loan | $40 | 12% | 2-year CD | $40 | 6% |
|
|
| Equity | $10 |
|
Total | $100 |
| Total | $100 |
|
a. What is market value of the ten-year loan if all market interest rates increase by 2 percent?
b. What is market value of the two-year CD if all market interest rates increase by 2 percent?
c. What is the impact on the FI's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments? Briefly discuss your results.
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