What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the two methods? What is marking to market?
What are the two different general interpretations of the concept of duration, and what is the technical definition of this term? How does duration differ from maturity?
A one-year, $100,000 loan carries a coupon rate and a market interest rate of 12 percent. The loan requires payment of accrued interest and one-half of the principal at the end of six months. The remaining principal and accrued interest are due at the end of the year.
a. What will be the cash flows at the end of six months and at the end of the year?
b. What is the present value of each cash flow discounted at the market rate? What is the total present value?
c. What proportion of the total present value of cash flows occurs at the end of six months? What proportion occurs at the end of the year?
d. What is the duration of this loan?