Explanation:
The change in asset value would be a decrease of [($500,000,000)(7)(0.005)] = $17,500,000, whereas the change in liability value would be a decrease of [($400,000,000)(5)(0.005)] = $10,000,000. The net effect would be a decline in equity value of $7.5 million.
(Book 4, Module 58.2, LO 58.f)
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Question 50
A bank has $500 million in assets with a modified duration of 7 and $400 million in liabilities with a modified duration of 5. Accounting only for duration effects, the impact of a 50-basis-point parallel upward shift in the yield curve on the bank's equity value is closest to a:
A
$7.5 million decrease.
B
$7.5 million increase.
C
$15 million decrease.
D
$15 million increase.
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