[Q 30] Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 12
Question:
[Q 30] Consider the following two banks:
Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $1 million loan with a 12 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $1 million CD with a 10 percent yield to maturity.
Bank 2 has assets composed solely of a 7-year, 12 percent, zero-coupon bond with a current value of $894,006.20 and a maturity value of $1,976,362.88. It is financed with a 10-year, 8.275 percent coupon, $1,000,000 face value CD with a yield to maturity of 10 percent.
All securities except the zero-coupon bond pay interest annually.
a.If interest rates rise by 1 percent (100 basis points), how do the values of the assets and liabilities of each bank change?
b.What accounts for the differences between the two banks' accounts?
[Q 32] What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannual coupon selling at par? Selling with a yield to maturity of 12 percent? 14 percent? What can you conclude about the relationship between duration and yield to maturity? Plot the relationship. Why does this relationship exist?