The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points.

Question

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.  Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points.

Quizplus · Accepted Answer

Using the duration model formula, the approximate change in market value for the two-year loan is: -2 x (duration) x (change in interest rate) x (market value per $100 face value)
Duration for a two-year loan is (2 - 2(0.95))/0.1 = 1 year
Hence, the market value change is -2 x 1 x (0.01) x (100) = -$2
Therefore, the answer is B, which is closest to -$2.

The Following Information Is About Current Spot Rates for Second