$$\begin{array} { l l l l }
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-If the loan portfolio consists of a five-year, 10 percent annual coupon loan selling at par, what is the market, or economic, value of capital if interest rates increase 1 percent?

Question

$$\begin{array} { l l l l } 
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-If the loan portfolio consists of a five-year, 10 percent annual coupon loan selling at par, what is the market, or economic, value of capital if interest rates increase 1 percent?

Quizplus · Accepted Answer

The market value of capital is calculated by adjusting the value of loans for the change in interest rates. When interest rates increase by 1%, the present value of the loan cash flows decreases. The new market value of the loans is calculated using the new interest rate, and the difference from the original value is subtracted from the capital. The correct calculation results in a market value of capital of $7 million.

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