Problem:
All assets and liabilities are currently priced at par and pay interest annually.
|
Assets
|
Amount ($ millions)
|
Annual Rate
|
Liabilities
|
Amount ($ millions)
|
Annual Rate
|
|
1-year bonds
|
$60
|
7 %
|
1-year CD
|
$50
|
5 %
|
|
10-year loan
|
$40
|
12 %
|
2-year CD
|
$40
|
6 %
|
|
|
|
|
Equity
|
$10
|
|
|
Total
|
$100
|
|
Total
|
$100
|
|
1. What is market value of the ten-year loan if all market interest rates increase by 2 percent?
a. $40.000 million.
b. $44.916 million.
c. $37.830 million.
d. $42.356 million.
e. $35.827 million.
2. What is market value of the two-year CD if all market interest rates increase by 2 percent?
a. $40.381 million.
b. $39.626 million.
c. $40.000 million.
d. $38.750 million.
e. $40.769 million.
Summary
This question is from Finance as well as it is about computation of market value of 10 year loan if the interest rates raised by 2% and the market value of Certificate of Deposit if interest rates raised by 2%. These have been computed in the solution.