Consider the following two banks: • Bank 1 has assets composed solely of a 12-year, 12% coupon, $1 million bond with a 12% yield to maturity. It is financed with a 12-year, 10% coupon, $1million bond with a 10% YTM • Bank 2 has assets composed solely of a 9-year, 12%, zero-coupon bond with a current value of $894,006.20 and a maturity value of $1,976,362.88. It is financed by a 12-year, 8.275%coupon, $1,000,000 face value bond with a yield to maturity of 10%. All securities, accept the zero-coupon bond, pay interest semi-annually and the zero- coupon bond has semi-annual compounding period. a) If interest rates rise by 1% (or 100 bps). How do the values of the assets and liabilities of each bank change?
