17-62 What is the asset adjustment to a bank's balance sheet if the bank sold a five-year,7 percent annual coupon $100,000 bond acquired at par,but now yielding 8 percent? The bond was not in the mark-to-market portfolio.

Question

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If the bank sold the bond at the current market yield of 8%, it would receive less than its par value of $100,000. Assuming it sold the bond at a price equal to its present value (PV), the PV of the bond's cash flows discounted at 8% for 5 years would be $96,007. Therefore, the bank would recognize a $100,000 loss on its investment, which would reduce its assets by the same amount.

17-62 What Is the Asset Adjustment to a Bank's Balance