$$\begin{array} { l l l l }
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-If the loan portfolio consists of 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

$$\begin{array} { l l l l } 
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-If the loan portfolio consists of 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

The market value of the loan portfolio is $\frac{.1 	imes 760}{(.1-.02)} = 912$. Thus, the bank's economic net worth is $250 + 912 - 975 - 35 = \boxed{\$ 152 	ext{ million}}$.

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