ISSUE FLOATING RATE AGREE INTEREST RATES WERE TO RISE BY MORE THAN...

2. Issue floating rate Agree interest rates were to rise by more than the 3% CDs that cannot be cap on the loan, Corinthian would not receive any withdrawn prior to more income, but its cost of funds on the floating maturity to eliminate rate CD could continue to increase. A fixed rate Disagreecap risk CD would eliminate cap risk. Part B Economic surplus = Market value of assets – Present value of liabilities $4 million = $60 million – Present value of liabilities Present value of liabilities = $56 million 2006 Level III Guideline Answers Morning Session - Page 26

Question: 9 Topic: Asset Valuation – Fixed Income Valuation Minutes: 14 Part C The economic surplus would increase. The change in the economic surplus would be $0.97 million or $970,000. The new economic surplus would be $4.97 million. Calculations: The specific impact to the market value of the assets would be a decline in value from $60 million to $59.85 million: Change in value = Assets × duration × ∆rates Change in value = $60 million

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0.50

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0.005 = $0.15 million Market value = $60 million – $0.15 million = $59.85 million The specific impact to the PV of the liabilities would be a decline in value from $56 million to $54.88 million: Change in value = Liabilities

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duration

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∆rates Change in value = $56 million

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4.00

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0.005 = $1.12 million Present value = $56 million – $1.12 million = $54.88 million Economic surplus = MV of assets – PV of liabilities = $59.85 – $54.88 = $4.97 million Change in economic surplus = new economic surplus of $4.97 million – previous economic surplus of $4.00 million Change in economic surplus = $0.97 million Morning Session - Page 27Reading References: