You have two Banks, A and B. Both have bonds as assets and, given the bonds have different maturities and coupons, they will have different interest rate risks. 1. What is value of equity for each bank? 2. At what yield or higher would each bank be insolvent (defined as negative net worth) and what is the probability of this outcome? Let us assume historic yields on both bonds range from 1% to 10%.

Bank A Assets Eight of 23-year 5% bonds priced to yield 4.2% Reserves Liabilities and Equity $18,500.00 Deposits Equity $10,000.00 Bank B Assets Nine 4-year 2% bonds priced to yield 3.5% Reserves Liabilities and Equity $18,500.00 Deposits Equity $10,000.00 Bank A Assets Eight of 23-year 5% bonds priced to yield 4.2% Reserves Liabilities and Equity $18,500.00 Deposits Equity $10,000.00 Bank B Assets Nine 4-year 2% bonds priced to yield 3.5% Reserves Liabilities and Equity $18,500.00 Deposits Equity $10,000.00