Bank 1 has assets composed solely of a 10-year, 13.25 percent coupon, $2.7 million loan with a 13.25 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.7 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 13.25 percent, zero-coupon bond with a current value of $2,285,241.72 and a maturity value of $5,460,087.71. It is financed by a 10-year, 7.50 percent coupon, $2,700,000 face value CD with a yield to maturity of 10 percent. All securities except the zero-coupon bond pay interest annually. a. If interest rates rise by 1 percent (100 basis points), what is the difference in the value of the assets and liabilities of each bank? (Do stive amounts should be indicated by a minus sign. Enter the answers in dollars, not
Bank 1 has assets composed solely of a 10-year, 13.25 percent coupon, $2.7 million loan with a 13.25 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.7 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 13.25 percent, zero-coupon bond with a current value of $2,285,241.72 and a maturity value of $5,460,087.71. It is financed by a 10-year, 7.50 percent coupon, $2,700,000 face value CD with a yield to maturity of 10 percent. All securities except the zero-coupon bond pay interest annually. a. If interest rates rise by 1 percent (100 basis points), what is the difference in the value of the assets and liabilities of each bank? (Do stive amounts should be indicated by a minus sign. Enter the answers in dollars, not
Chapter9: The Cost Of Capital
Section: Chapter Questions
Problem 16P
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Transcribed Image Text:Consider the following two banks:
Bank 1 has assets composed solely of a 10-year, 13.25 percent coupon, $2.7 million loan with a 13.25 percent yield to maturity. It is
financed with a 10-year, 10 percent coupon, $2.7 million CD with a 10 percent yield to maturity.
Bank 2 has assets composed solely of a 7-year, 13.25 percent, zero-coupon bond with a current value of $2,285,241.72 and a maturity
value of $5,460,087.71. It is financed by a 10-year, 7.50 percent coupon, $2,700,000 face value CD with a yield to maturity of 10
percent.
All securities except the zero-coupon bond pay interest annually.
a. If interest rates rise by 1 percent (100 basis points), what is the difference in the value of the assets and llabilities of each bank? (Do
not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter the answers in dollars, not
millions of dollars. Round your answers to 2 decimal places. (e.g., 32.16))
Bank 1
Bank 2
Before Interest
Rise
Asset Value
After Interest
Rise
Difference
Before Interest
Rise
Liabilities Value
After Interest
Rise
Difference
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