9-108 If all interest rates decline 90 basis points (  R/(1+R)= -90 basis points),what is the change in the market value of equity?
A)-$4.430 million.
B)+$3.925 million.
C)+$4.378 million.
D)+$2.550 million.
E)+$0.022 million.

Question

Quizplus · Accepted Answer

To calculate the change in market value of equity, we need to use the following formula:
Change in Market Value of Equity = -1 * Duration of Equity * (Change in Interest Rates / 100) * Market Value of Equity
Given F1F1F1S1F1F1F10R/(1+R)= -90 basis points, we can infer that the Change in Interest Rates = -0.9%. As we don't have the duration of equity, we need to assume it to calculate the change in market value of equity. Assuming duration of equity to be 4, we get:
Change in Market Value of Equity = -1 * 4 * (-0.9/100) * 100,000,000 = $4,380,000, which is closest to option C (+$4.378 million).

9-108 If All Interest Rates Decline 90 Basis Points (