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What is the present value of the bank equity

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ESG Prime Bank has an obligation of $750 at the end of the first period and $550 at the end of the second period. It also has $1,528.93 to invest and can choose between zero-coupon bond or the coupon bond. The coupon bond matures in two years, pays an annual coupon of $100, and has a balloon payment of $1,400. The zero-coupon bond has a balloon payment of $1,610 at the end of the second year. The default-free yield on a one-year bond is 10%, and the annualized yield on a two-year bond is also 10%.

What is the present value of the bank's equity?

(Hint: Some information presented in the scenario is not relevant in solving the problem. That is, the bank has not yet decided on its bond investment strategy.)

(ii) ?Suppose the interest rate at t = 1 is 8%. What will be ESG Prime Bank's equity if it invests in the zero-coupon bond?

Reference no: EM133068581

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