Zero-Coupon Bond Assignment

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February 19th, 2020

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A financial institution invests in a zero-coupon bond with a maturity (principal)
value of $900,000 and a maturity of 2 years. The bond is partially funded
through a libility with a current market value of $475,000 and has a duration of
3 years. The current market rate is 7% and interest rates are expected to increase
by 1%. Which of the following statements is true?
(a) The current equity value of the position is $425,000 and if interest rates increase
the equity value will increase.
(b) The current equity value of the position is $311,095 and if interest rates increase
the equity value will decrease.
(c) The current equity value of the position is $311,095 and if interest rates increase
the equity value will increase.
(d) The current equity value of the position is $425,000 and if interest rates increase
the equity value will decrease.
(e) None of the given answers. Get Finance homework help today

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