Use the following bank information for questions .
$\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$ 200 & && \text {Time Deposits } & \$ 600 &2.0 \% & 1.500 \
\hline \text { Loans } & \$ 800 & 8.0 \% & 3.750 &\text { CDs } & \$ 500 & 4.5 \% & 3.125 \
\hline\text { T-Bonds }&\$250&4.0\%&7.250&\text { Equity }&\$150&&\
\hline\text { Total }&\$1,250&&&&\$1,250\
\hline
\end{array}$
-If interest rates decrease 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?
A) -$2.56
B) $5.84
C) -$5.84
D) $22.19
E) -$22.19

Question

Use the following bank information for questions .
 $\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$  200 & && \text {Time Deposits } & \$  600 &2.0 \% & 1.500 \
\hline \text { Loans } & \$ 800 & 8.0 \% & 3.750 &\text { CDs } & \$  500 & 4.5 \% & 3.125 \
\hline\text { T-Bonds }&\$250&4.0\%&7.250&\text { Equity }&\$150&&\
\hline\text { Total }&\$1,250&&&&\$1,250\
\hline
\end{array}$
-If interest rates decrease 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?
A) -$2.56
B) $5.84
C) -$5.84
D) $22.19
E) -$22.19

Quizplus · Accepted Answer

The change in the economic value of equity (ΔEVE) can be calculated using the formula: ΔEVE = ΔA - ΔL, where ΔA is the change in the value of assets and ΔL is the change in the value of liabilities. The change in value due to a 1% decrease in interest rates can be approximated by multiplying the duration of each asset or liability by its market value and the change in interest rates (in decimal form). For assets: ΔA = (200*0 + 800*3.750 + 250*7.250)*0.01 = 0 + 30 + 18.125 = 48.125 For liabilities: ΔL = (600*1.500 + 500*3.125)*0.01 = 9 + 15.625 = 24.625 ΔEVE = ΔA - ΔL = 48.125 - 24.625 = 23.5 However, since none of the provided options exactly match this calculation, the closest option, which is $22.19, is considered the correct approximation.

Use the Following Bank Information for Questions -If Interest Rates Decrease 1% for All Assets and Liabilities