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9. A commercial bank invests in a loan with a current market value of $600,000...

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Finance

9. A commercial bank invests in a loan with a current market value of $600,000 and a

maturity of 3 years. The bank partially funds the loan by issuing a zero coupon bond

with a maturity (principal) value of $450,000 and a duration of 3 years. The current

market rate is 7% and interest rates are expected to increase by 1%. Which of the

following statements is true?

(a) The current equity value of the position is $150,000 and if interest rates increase the

equity value will increase.

(b) The current equity value of the position is $232,666 and if interest rates increase the

equity value will increase.

(c) The current equity value of the position is $232,666 and if interest rates increase the

equity value will decrease.

(d) The current equity value of the position is $150,000 and if interest rates increase the

equity value will remain the same.

(e) None of the given answers. The current equity value of the position is $232,666 and if

interest rates increase the equity value will remain the same as the maturity gap is 0.

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