20-135 If the Loan Portfolio Consists of a Five-Year,10 Percent

question 70

Multiple Choice

20-135 If the loan portfolio consists of a five-year,10 percent annual coupon loan selling at par,what is the market,or economic,value of capital if interest rates increase 1 percent?

• A)$35 million.
• B)-$155 million.
• C)$7 million.
• D)-$7 million.
• E)$0.

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Definitions:

Real Rate

The interest rate adjusted for inflation, reflecting the true cost of borrowing and the true return on lending.

Inflation Rate

The growth rate of the overall cost level for goods and services, undermining the efficacy of monetary resources.

Spot Rate

The current price in the marketplace at which a given asset—such as a currency, commodity, or security—can be bought or sold for immediate delivery.

Forward Rate

The predetermined price for a transaction that will occur at a specific future date, used in the context of currency and interest rate markets.