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Item 4
Problem 3-30 (LG 3-4)
Consider the following two banks:
Bank 1 has assets composed solely of a 10-year, 11.50 percent coupon, $2.0 million loan with a 11.50 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.0 million CD with a 10 percent yield to maturity.
Bank 2 has assets composed solely of a 7-year, 11.50 percent, zero-coupon bond with a current value of $2,092,168.51 and a maturity value of $4,482,504.49. It is financed with a 10-year, 10.75 percent coupon, $2,000,000 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?