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 isfinanced 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 maturityvalue 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 10percent.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? (Donot round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter the answers in dollars, notmillions of dollars. Round your answers to 2 decimal places. (e.g., 32.16))Bank 1Bank 2Before InterestRiseAsset ValueAfter InterestRiseDifferenceBefore InterestRiseLiabilities ValueAfter InterestRiseDifference

BOND PRICE:The bond price refers to the market value of a bond, which represents the present worth…

Answered: Bank 1 has assets composed solely of a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Bank 1 has assets composed solely of a 10-year, 12.50 percent coupon, $2.4 million loan with a 12.50 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.4 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 12.50 percent, zero-coupon bond with a current value of $2,068,193.38 and a maturity value of $4,716,923.15. It is financed by a 10-year, 7.75 percent coupon, $2,400,000 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?
Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset Syr bond bought at a yield of 3.4% $55OM (lending money) 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $80OM 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability Zyr bond sold at a yield of 2.4% (borrowing money) 4yr bond sold at a yield of 2.8% (borrowing money) $300M 1.941 2.384 $500M 3.759 8.206 a) Calculate the equity (total asset- total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides; ( c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratic d) Incys scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero…
Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $1 million loan with a 12 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $1 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 12 percent, zero-coupon bond with a current value of $894,006.20 and a maturity value of $1,976,362.88. It is financed with a 10-year, 8.275 percent coupon, $1,000,000 face value CD with a yield to maturity of 10 percent. All securities except the zero-coupon bond pay interest annually. If interest rates rise by 1 percent (100 basis points), how do the values of the assets and liabilities of each bank change?
Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset5yr bond bought at a yield of 3.4% (lending money) $550M 4.56212.02612yr bond bought at a yield of 4% (lending money) $800M 9.45353.565 Liabilities Value Duration of the Liability Convexity of the Liability2yr bond sold at a yield of 2.4% (borrowing money) $300M 1.941 2.3844yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206 If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?
Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset $550M 12.026 Syr bond bought at a yield of 3.4% (lending money) 4.562 12yr bond bought at a yield of 4% $800M 9.453 53.565 (lending money) Value Duration of the Liability Convexity of the Liability Liabilities Zyr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) 4yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206 a) Calculate the equity (total asset - total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) ( b) Calculate the duration and convexity of the both asset and liability sides; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio; d) Inc's scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero…
Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.026 $800M 12yr bond bought at a yield of 4% (lending money) 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) 4yr bond sold at a yield of 2.8% $500M 3.759 8.206 (borrowing money) a) Calculate the equity (total asset – total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) to at –." b) Calculate the duration and convexity of the both asset and liability sides; » et c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio; the d) In c)'s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero…
Give typing answer with explanation and conclusion Consider the following two banks: • Bank A has assets composed solely of a 10-year, 9%, zero-coupon bond a maturity value of $1,800,000 (calculate its current value). It is financed by a 12-year, 8% coupon, $1,000,000 face value bond to yield 9.5% return. • Bank B has assets composed solely of a 9-year, 10% coupon, $1.7 million bond with a 11% yield to maturity. It is financed with a 8%, 16-year, zero-coupon bond with a maturity value of $3,100,000. All securities, accept the zero-coupon bond, pay interest semi-annually and the zero-coupon bond has semi-annual compounding period. Suppose that interest rates are expected to rise by 100bps Show me the change in the values of the asset and the liabilities for each bank.
Consider a bank with the following balance sheet (M means million):Assets Value Duration of the Asset Convexity of the Asset5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.02612yr bond bought at a yield of 4% (lending money)$800M 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% (borrowing money) $300M 1.941 2.384 4yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206 Calculate the equity
Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset $550M 5yr bond bought at a yield of 3.4% (lending money) 4.562 12.026 12yr bond bought at a yield of 4% $800M 9.453 53.565 (lending money) Liabilities Value Duration of the Liability Convexity of the Liability 2yr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) $500M 4yr bond sold at a yield of 2.8% (borrowing money) 3.759 8.206 a) Calculate the equity (total asset – total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) · b) Calculate the duration and convexity of the both asset and liability sides; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio; d) In c)'s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero…
Consider a bank with the following balance sheet (M means million):Assets Value Duration of the Asset Convexity of the Asset 5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $800M 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability2yr bond sold at a yield of 2.4%(borrowing money) $300M 1.941 2.384 4yr bond sold at a yield of 2.8%(borrowing money) $500M 3.759 8.206 If the interest rates go up by 1%, using the duration and convexity rule to determine the networth of the bank and the equity to asset ratio
Consider a bank with the following balance sheet (M means million):Assets Value Duration of the Asset Convexity of the Asset 5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $800M 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability2yr bond sold at a yield of 2.4%(borrowing money) $300M 1.941 2.384 4yr bond sold at a yield of 2.8%(borrowing money) $500M 3.759 8.206 Calculate the duration and convexity of the both asset and liability sides;
Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset 5yr bond bought at a yield of 3.4% (lending money) $550M 4.562 12.026 12yr bond bought at a yield of 4% $800M 53.565 (lending money) 9.453 Liabilities Value Duration of the Liability Convexity of the Liability $300M 2yr bond sold at a yield of 2.4% (borrowing money) 1.941 2.384 $500M 4yr bond sold at a yield of 2.8% (borrowing money) 3.759 8.206 a) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio; b) In a)'s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?

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