Bonds would eliminate interest-rate risk of equity holders

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Reference no: EM13908801

As a newly hired CEO of the People Trust Co., the first you do is to study the firm’s balance sheet. You find that your firm has $100 million in three-year loans (total assets), $70 million in one-year deposits (total liabilities) and $30 million in equity. You feel that the interest rate risk of equity holders is too high and decide to issue a $20 million long-term subordinated bond and repurchase $20 million equity. Which choice of bonds would eliminate interest-rate risk of equity holders?

A) A bond with a duration of 1

B) A bond with a duration of 3

C) A bond with a duration of 7.67

D) A bond with a duration of 11.5

Reference no: EM13908801

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