What is market value of the two-year CD if all market interest rates increase by 2 percent?
A)$40.381 million.
B)$39.626 million.
C)$40.000 million.
D)$38.573 million.
E)$40.769 million. [Refer to: 8-105]

Question

Quizplus · Accepted Answer

The market value of a two-year CD is inversely related to market interest rates. As market interest rates increase, the market value of the CD decreases. Using the bond valuation formula, we can calculate the market value of the CD as:
Market value = Face value / (1 + r)^n

where r is the market interest rate and n is the number of years until maturity.

Assuming a face value of $40 million and a current market interest rate of 4 percent, the current market value of the CD is:
Market value = $40 million / (1 + 0.04)^2 = $36.915 million

If all market interest rates increase by 2 percent, the new market interest rate will be 6 percent. Plugging this into the bond valuation formula, we get:
Market value = $40 million / (1 + 0.06)^2 = $32.427 million

Therefore, the market value of the CD would decrease by $4.488 million. The best choice is D, $38.573 million, as it is the closest option to the new market value.

What Is Market Value of the Two-Year CD If All