$\begin{array}{lccc}
\text { Securities (at par) } & \text { \$ 250 Deposits}& \$975 \
\text { Loans (at par)} & \text { \$ 760 Capital} & \$ 35
\end{array}$
If the loan portfolio consists of five-year,10 percent annual coupon par value loans,what is the market,or economic,value of capital if interest rates decrease 2 percent?

Question

$\begin{array}{lccc}
  \text { Securities (at par) } & \text { \$ 250  Deposits}& \$975  \
 \text { Loans (at par)} &    \text {  \$ 760  Capital} & \$ 35
\end{array}$
 If the loan portfolio consists of five-year,10 percent annual coupon par value loans,what is the market,or economic,value of capital if interest rates decrease 2 percent?

Quizplus · Accepted Answer

When interest rates decrease, the value of fixed-income securities like loans increases. The loans are five-year, 10% coupon loans, and a 2% decrease in interest rates will increase their market value. The economic value of capital is the difference between the market value of assets (loans and securities) and liabilities (deposits). The increase in the market value of loans will increase the economic value of capital to $96 million.

If the Loan Portfolio Consists of Five-Year,10 Percent Annual Coupon