If the relative change in interest rates is a decrease of 1 percent, calculate the impact on the bank's market value of equity using the duration approximation. (That is, ΔR/(1 + R) = -1 percent)
A)The bank's market value of equity increases by $325,550.
B)The bank's market value of equity decreases by $325,550.
C)The bank's market value of equity increases by $336,500.
D)The bank's market value of equity decreases by $336,500.
E)There is no change in the bank's market value of equity. [Refer to: 9-108]

Question

Quizplus · Accepted Answer

The bank's market value of equity increases because a decrease in interest rates generally leads to an increase in the market value of fixed-income assets due to the inverse relationship between interest rates and bond prices.

If the Relative Change in Interest Rates Is a Decrease