Calculate The Market Values Of Loan And Certificate of Deposit When Interest Rates Increase

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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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