This morning, Wapiti Bank received $4,000,000 in cash for a certificate of deposit. This CD has a 3-year maturity and an 8% annual cost. It only makes payments at maturity.

Wapiti Bank used the proceeds from this CD, plus equity, to make a 4-year loan to a start-up bio-tech company. Wapiti Bank gave out $5,000,000 in cash this morning. This loan was priced at an 8% yield-to-maturity (YTM) and will be paid back to Wapiti Bank in 4 equal, annual installments (fully amortizing) at the end of each of the next 4 years. These are the only two securities that Wapiti Bank has, other than equity.

Immediately after these transactions were simultaneously closed this morning, all market interest rates decreased by 300 basis points due to the Federal Reserves concerns about a deepening recession.

(a) Using the duration model, what is the approximate change in the value of Wapiti Banks equity with the 300 basis point decrease in interest rates?

(b) What is the exact amount of the change in the value of Wapiti Banks equity with the 300 basis point decrease in market interest rates? Be precise (or, be exact).

(c) Using support from our duration discussions, briefly explain what happened to Wapiti Banks equity.