Reference no: EM132847007

Question - Consider the following simplified example of a commercial bank, which is borrowing and lending funds of two maturities: short-term (1 year) and long-term (2 years), all zero-coupon. Loans consist of $40 million short term and $40 million long term, while liabilities are $60 million short term and $10 million long term. All numbers are in market value terms as of October 30, 2012. Hence, the bank's balance sheet is

Assets

Short term loans 40,000,000

Long term loans 40,000,000

Total loans 80,000,000

Liabilities

Short term liabilities 60,000,000

Long term liabilities 10,000,000

Total liabilities 70,000,000

Equity 10,000,000

Total equity and liabilities 80,000,000

Assume that the yield curve as of October 30, 2012, is a flat solid line; Annual yields on assets and liabilities of all maturities are 10%. Now suppose that on October 31, 2012, the yield curve shifts parallel such that all yields rise to 12%.

Required -

A) What is the new balance sheet of the bank?

B) What is the impact of a parallel shift in the yield curve to the economic value of the bank?