QUESTION 25

Bank Asset Bond A				Bank Liability L
Settlement		8/16/2020		Settlement	8/16/2020
Maturity		8/16/2030		Maturity	8/16/2022
Rate	10%			Rate	8%
Yield	9%			Yield	7%
Redemption	100			Redemption	100
frequency	2			frequency	2
basis	0			basis	0

2. Assume that the only bank asset is the bond A above and the only bank liability is the liability L above.
3. What happens to bank capital (also called net worth) if market yields decline by 100 basis points. The entire yield curve falls by 100 basis points and all spreads in the economy between risky bonds and risk free bonds remains as they were before the yield curve shift.
4. Bank capital declines due to the yield curve shift.
6. You will have to use the EXCEL "Price" function to solve this problem.
7. True
8. False