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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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