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Suppose you run a bank whose only asset is a 30-year to maturity zero-coupon $1000 face value bond, and whose only liability is a 5-year
Suppose you run a bank whose only asset is a 30-year to maturity zero-coupon $1000 face value bond, and whose only liability is a 5-year zero coupon $250 face value bond.
a) Calculate your banks net worth at the following interest rates:
i) 2%
ii) 5%
iii) 7%
b) What important point about banking does this exercise illustrate?
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