What is the impact on economic capital of a 25 basis point decrease in interest rates if the FI is holding a 20-year, fixed-rate, 11 percent annual coupon bond selling at a par value of $100,000?

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Quizplus · Accepted Answer

An increase in the value of a fixed-rate bond occurs when interest rates decrease, because the fixed coupon payments become more valuable compared to new bonds issued at the lower current interest rates. The specific impact on the bond's value depends on its duration, coupon rate, and the size of the interest rate change. In this case, a 25 basis point decrease in interest rates would increase the economic value of the bond, as its fixed interest payments are now more valuable compared to the market. The exact amount of increase ($2,024) would be calculated based on the bond's duration and the change in interest rates.

What Is the Impact on Economic Capital of a 25