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Solution Library
Calculate The Market Values Of Loan And Certificate of Deposit When Interest Rates Increase
Question
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 belongs to Finance and it is about calculation of market value of a 10 year loan if the interest rates increased by 2% and the market value of Certificate of Deposit if interest rates increased by 2%. These have been calculated in the solution.
Total Word Count 46
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