# Calculate The Market Values Of Loan And Certificate of Deposit When Interest Rates Increase

Question

All assets and liabilities are currently priced at par and pay interest annually.

 Assets Amount (\$ millions) Annual Rate Liabilities Amount (\$ millions) Annual Rate 1-year bonds \$60 7 % 1-year CD \$50 5 % 10-year loan \$40 12 % 2-year CD \$40 6 % Equity \$10 Total \$100 Total \$100

1. What is market value of the ten-year loan if all market interest rates increase by 2 percent?
a. \$40.000 million.
b. \$44.916 million.
c. \$37.830 million.
d. \$42.356 million.
e. \$35.827 million.

2. What is market value of the two-year CD if all market interest rates increase by 2 percent?
a. \$40.381 million.
b. \$39.626 million.
c. \$40.000 million.
d. \$38.750 million.
e. \$40.769 million.

Summary

This question belongs to Finance and it is about calculation of market value of a 10 year loan if the interest rates increased by 2% and the market value of Certificate of Deposit if interest rates increased by 2%. These have been calculated in the solution.

Total Word Count 46

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