The Following Is an FI's Balance Sheet ($Millions)

question 63

Multiple Choice

The following is an FI's balance sheet ($millions) . Notes to Balance Sheet: Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. GICs are 1-year pure discount certificates of deposit paying 4.75 percent.
What will be the impact, if any, on the market value of the bank's equity if all interest rates increase by 75 basis points?

• A)The market value of equity will decrease by $15,750.
• B)The market value of equity will increase by $15,750.
• C)The market value of equity will decrease by $426,825.
• D)The market value of equity will increase by $426,825.
• E)There will be no impact on the market value of equity.

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Definitions:

Substitute Resource

A resource or product that can be used in place of another to fulfill a similar function or need.

Marginal Revenue Product Curve

A graphical representation showing how the revenue generated from selling an additional unit of a good or service changes as more units are produced.

Purely Competitive Seller

A firm operating in a market where it must accept the prevailing market price and cannot influence it.

Law of Diminishing Returns

An economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other inputs remain at a constant.