Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 30, Problem 12P
You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn’s balance sheet is as follows (in millions of dollars):
When you analyze the duration of loans, you find that the duration of the auto loans is two years, while the mortgages have a duration of seven years. Both the cash reserves and the checking and savings accounts have a zero duration. The CDs have a duration of two years and the long-term financing has a 10-year duration.
- a. What is the duration of Acorn’s equity?
- b. Suppose Acorn experiences a rash of mortgage prepayments, reducing the size of the mortgage portfolio from $150 million to $100 million, and increasing cash reserves to $100 million. What is the duration of Acorn's equity now? If interest rates are currently 4% but fall to 3%, estimate the approximate change in the value of Acorn’s equity.
- c. Suppose that after the prepayments in part (b), but before a change in interest rates, Acorn considers managing its risk by selling mortgages and/or buying 10-year Treasury STRIPS (zero-coupon bonds). How many should the firm buy or sell to eliminate its current interest rate risk?
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Chapter 30 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 30.1 - How can insurance add value to a firm?Ch. 30.1 - Prob. 2CCCh. 30.2 - Prob. 1CCCh. 30.2 - What are the potential risks associated with...Ch. 30.3 - How can firms hedge exchange rate risk?Ch. 30.3 - Prob. 2CCCh. 30.4 - How do we calculate the duration of a portfolio?Ch. 30.4 - How do firms manage interest rate risk?Ch. 30 - The William Companies (WMB) owns and operates...Ch. 30 - Genentechs main facility is located in South San...
Ch. 30 - Prob. 3PCh. 30 - Your firm faces a 9% chance of a potential loss of...Ch. 30 - BHP Billiton is the worlds largest mining firm....Ch. 30 - Prob. 6PCh. 30 - Prob. 7PCh. 30 - Prob. 9PCh. 30 - Prob. 10PCh. 30 - Prob. 11PCh. 30 - You have been hired as a risk manager for Acorn...Ch. 30 - Prob. 13PCh. 30 - Prob. 14P
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