Question

Suppose a bank holds a $3,000,000, 5 year annual bond with a 6.5% coupon. The bank pays for this bond with a$3,000,000 1 year CD with an annual interest rate of 2.45% interest. What is the asset value if interest rates rise by 75 basis points?

Answer 1

Year Asset value if Interest rate rise by 75 basis points Interest@6.5% Present Value and Principle Annuity Factor outflow Cash Flow (A) @ 3.2% (B) Present Value (A*B) 1 3000000*6.5% 195000 0.969 188953 2 3000000*6.5% 195000 0.939 183094 3 3000000*6.5% 195000 0.910 177417 4 3000000*6.5% 195000 0.882 171916 5 3000000*6.5% 195000 0.854 166585 53000000 3000000 0.854 2562848 Total 3450813 Note :Annuity Factor Interest Rate Basis Points 2.45 0.75 3.2