Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.

-What is the impact on the FI's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments?
A)Equity rises by $4.318 million.
B)Equity declines by $2.912 million.
C)Equity rises by $2.060 million.
D)Equity declines by $1.880 million.

Question

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.

-What is the impact on the FI's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments?
A)Equity rises by $4.318 million. 
B)Equity declines by $2.912 million. 
C)Equity rises by $2.060 million. 
D)Equity declines by $1.880 million.

Quizplus · Accepted Answer

Change in equity due to a 2 percent increase in market rates:
∆E = ∆A - ∆L
∆A = (58,899,082 - 60,000,000) + (35,827,107 - 40,000,000) = -1,100,918 - 4,172,893 = -$5,273,811
∆L = (49,065,420 - 50,000,000) + (38,573,388 - 40,000,000) = -934,580 - 1,426,612 = -$2,361,192
∆E = -$5,273,811 - (-2,361,192) = -$2,912,619
The value of equity will fall $2.912 million.

Hadbucks National Bank Current Balance Sheet Appears Below