Consider an Asset with a Current Market Value of $250

question 9

Multiple Choice

Consider an asset with a current market value of $250 000 and a duration of 3.3 years. Assume the asset is partially funded through zero-coupon bonds which currently sells for $225 000 and has a maturity of 4 years. The current discount rate is 15 per cent and interest rates are expected to increase by 150 basis points. Which of the following statements is true?

• A) The current net worth of the position is $25 000 and if interest rates increase the net worth will not be affected.
• B) The current net worth of the position is $25 000 and if interest rates increase the net worth will increase, too.
• C) The current net worth of the position is $25 000 and if interest rates increase the net worth will decrease.
• D) The current net worth of the position cannot be determined, however, if interest rates increase the net worth will increase, too.

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