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4. Suppose a bank has financed a $5,000,0006-year loan with an annual coupon rate of 6.57% with a 4 -year $5,000,000CD with a semiannual coupon rate of 5.15%. The yield on the loan is 6.45% and the yield on the CD is 5.25%. a. Calculate the (i) duration and (ii) modified duration for the loan. (8 points) b. Calculate the (i) duration and (ii) modified duration for the CD. (8 points) c. If market interest rates increase 120 basis points, estimate the effect on the market value of the bank's equity from this arrangement. ( 6 points) 5. An insurance company owns a 30-year 6 percent Treasury bond. The bond has a $100,000 face value and pays its coupon semiannually. Its duration is 14.0012, current market price is $96,631 and its current yield to maturity is 6.25%. The insurance company is concerned that interest rates may increase by 98 basis points. Treasury bond futures are currently available with a price of 99.2. a. If interest rates rise by 85 basis points, what will be the impact on the insurance company's Treasury bond value? Support your answer with appropriate calculations. (4 points) b. If the insurance company hedges its position in the Treasury bond with a Treasury future, what position should it take in the future? Why? ( 3 points) c. Suppose interest rates rise by the expected 85 basis points and the insurance company has hedged its position as you recommend in b. Calculate the net value of the hedge after the increase in interest rates. (6 points) 6. A financial institution currently uses a base rate of 7%, charges an origination fee of 0.97% and requires a compensating balance of 20%. The Federal Reserve imposes a 10% reserve requirement on the bank's demand deposits. For a customer with a 5.2% risk premium, calculate the bank's ROA on the loan. (6 points) 7. A bank is considering a loan applicant for a $9,750,0004-year loan. The servicing fee is expected to be 55 basis points and the bank's cost of funds, its RAROC benchmark, is 9%. The estimated maximum change in the borrower's risk premium is 7.2%. The loan's duration is 3.4956 years and current market interest rates for similar loans is 9.8%. Based on the RAROC model, should the bank make the loan? Why or why not? (10 points)

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