Explanation:
The asset value change would be a decrease of [($800,000,000)(5)(0.0025)] = $10,000,000. The liability value would decrease by [($400,000,000)(5)(0.0025)] = $5,000,000. The net effect would be a decline in equity value of $5 million.
(Book 4, Module 58.2, LO 58.d)
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Question 69
A financial analyst at a mutual fund is conducting a scenario analysis to see how a shift in the yield curve will affect the equity value of one of its bank stocks. The bank has a modified duration of 5 for both its assets and liabilities. Assuming a 25-basis-point upward shift in the yield curve, how would the bank's equity value change if it has $800 million in assets and $400 million in liabilities?
A
$5,000,000 decrease.
B
$5,000,000 increase.
C
$10,000,000 decrease.
D
$10,000,000 increase.
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