Question

Question 14 5 pts Hadbucks National Bank current balance sheet appears below. 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 79% 1-year CD $50 5% 10-year loan $40 12% 2 - year CD $40 6% Equity $10 Total $100 Total $100 What is the impact on the Fl's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments? O Equity rises by $2.060 million. O Equity declines by $2.912 million. O Equity declines by $1.880 million. O Equity does not change. O Equity rises by $4.318 million.

Answer 1

1. Value of Assets after 2 % rise in interest rates

1 Year Bonds = "=PV(RATE,NPER,PV,FV)"

1 Year Bonds = "=PV(0.09,1,-4.20,-60)"

1 Year Bonds = $58.8991

10 Year Loan = "=PV(RATE,NPER,PV,FV)"

10 Year Loan = "=PV(0.14,10,-4.8,-40)"

10 Year Loan = $35.8271

Total value of Assets = 58.8991 + 35.8271 = $94.7262

2. Value of Liabilities after 2% rise in interest rates

1 Year CD = "=PV(RATE,NPER,PV,FV)"

1 Year CD = "=PV(0.07,1,-2.50,-50)"

1 Year CD = $49.0654

2 Year CD = "=PV(RATE,NPER,PV,FV)"

2 Year CD = "=PV(0.08,1,-2.4,-40)"

2 Year CD = $38.5734

Total value of Liabilities = 49.0654 + 38.5734 = 87.6388

3. Equity after change in interest rates = Total Value of Assets - Total Liabilities = 94.7262 - 87.6388 = $7.0873

4. Net Change in Equity = 10 - 7.0873 = 2.912 Million Option B Equity will decline by $2.912 Million