What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship.Assume r = 4 percent.
A)-27.56 million.
B)-28.01 million.
C)-29.85 million.
D)-31.06 million.
E)-33.76 million.
[Refer to: 9-121]

Question

Quizplus · Accepted Answer

We can use the duration approximation to estimate the change in the market value of equity for the FI:

%ΔMVE = -D × %Δr

Where:
D = Duration of equity 
r = Interest rate

Using the information provided in the table, we can see that the duration of equity is 7.46 years.

Thus, a 100 basis point increase in interest rates (i.e. 1%) would result in a:

%Δr = 1%
%ΔMVE = -7.46 × 1%
%ΔMVE = -0.0746

To calculate the dollar amount of this change, we can multiply the percentage change by the market value of equity:

%ΔMVE = -$40,000,000 × 0.0746
%ΔMVE = -$2,984,000

Therefore, the estimated effect of a 100 basis point increase in interest rates on the market value of equity of the FI is a decrease of $2,984,000, or approximately $29.85 million.

The correct answer is C.

What Is the Effect of a 100 Basis Point Increase