The following is an FI's balance sheet ($millions).

Notes to Balance Sheet.

Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent.

-What will be the impact,if any,on the market value of the bank's equity if all interest rates increase by 75 basis points?

Question

The following is an FI's balance sheet ($millions).

Notes to Balance Sheet.
 
 Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent.

-What will be the impact,if any,on the market value of the bank's equity if all interest rates increase by 75 basis points?

Quizplus · Accepted Answer

Change in the market value of equity, leverage-adjusted duration gap 11efb87f_7f46_101b_9137_957603dbe726_TB1314_00 An increase in interest rates will decrease the market value of a bank's equity since higher interest rates increase the cost of borrowing for the bank and reduce the value of fixed income securities in their portfolio. Using the formula, the expected impact on the market value of equity would be:

Expected impact = -0.05 x $85,365,000 x 0.0075 = -$31,992.19

Therefore, the market value of equity would decrease by $31,992.19 x 13.35 = $426,825.

The Following Is an FI's Balance Sheet ($Millions)