The Numbers Provided by Fourth Bank of Duration Are in Thousands

question 110

Multiple Choice

The numbers provided by Fourth Bank of Duration are in thousands of dollars.

Notes: All Treasury bills have six months until maturity.One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually.Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years.Time deposits have a 1-year duration and the Fed funds duration is 0.003 years.Fourth Bank of Duration assigns a duration of zero (0) to demand deposits.
-If the relative change in interest rates is a decrease of 1 percent,calculate the impact on the bank's market value of equity using the duration approximation. (That is, $\Delta$ R/(1 + R) = -1 percent)

• A)The bank's market value of equity increases by $325,550.
• B)The bank's market value of equity decreases by $325,550.
• C)The bank's market value of equity increases by $336,500.
• D)The bank's market value of equity decreases by $336,500.

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Definitions:

Price-taker Firm

A firm that has no control over the market price and must accept the prevailing market price for its products.

Marginal Revenue

The extra revenue generated by the sale of an additional unit of a product or service.

Marginal Cost

The cost of producing one additional unit of a product or service.

Average Variable Cost

The total variable expenses divided by the number of units produced, representing the variable cost per unit.