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Calculate The Change In Assets, Liabilities And Equity Of Bank On Change In Interest Rates

Question

All assets and liabilities are currently priced at par and pay interest annually.

Assets

Amount

($ millions)

Annual

Rate

Liabilities

Amount

($ millions)

Annual

Rate

2-year loans

$40

8 %

5-year term deposit

$30

6 %

3-year loans

$60

8 %

3-year CD

$60

7 %

 

 

 

Equity

$10

 

Total

$100

 

Total

$100

 


1. What is the change in the value of its assets if all interest rates decrease by 1 percent?
    a.    Approximately $1.61 million.
    b.    Approximately $2.29 million.
    c.    Approximately $1.93 million.
    d.    Approximately $2.20 million.
    e.    Approximately $2.52 million.

2. What is the change in the value of its liabilities if all interest rates decrease by 1 percent?
    a.    Approximately $2.0 million.
    b.    Approximately $2.3 million.
    c.    Approximately $2.6 million.
    d.    Approximately $2.9 million.
    e.    Approximately $3.2 million.

3. What is the effect on the value of the FI’s equity if interest rates decrease by 1 percent?
    a.    Gain of $0.6968 million.
    b.    Gain of $0.30 million.
    c.    Loss of $1.6212 million.
    d.    No change in equity.
    e.    Loss of $0.6048 million.

4. What should be the rate on the two-year loan in order for the value of the equity to remain at $10 million? Assume the interest rates for all other instruments decreased by 1 percent.
    a.    5.50 percent.
    b.    6.19 percent.
    c.    4.15 percent.
    d.    6.54 percent.
    e.    7.25 percent.

Summary

This question belongs to Finance and it is about calculation of change in the value of assets and liabilities if interest rates decrease and effect of value of bank’s equity if interest rates decrease. These have been answered in the solution with calculations.

Total Word Count 237

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Comments

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