Question: Suppose that the term structure is at r0 = 4% APR, compounded
Excel Problem. Suppose that the term structure is at r0 = 4% APR, compounded monthly. Consider the balance sheet of a credit union. The credit union has $100M in demand deposit and the bank lends out all of the deposit as car loans. The car loans are all issued at the same time and have a maturity of 5 years with monthly payments. Suppose that the car loans are e ectively risk less and have an interest rate of 4% APR compounded monthly.
(a) Find the required (total) monthly payments and duration of the car loans. Hint: you can either
use the annuity formula or you can use solver in excel.
(b) If interest rates rise to 4.1%, what is the new value of the car loans? Note: if rates rise, the
value of the demand deposits do not change, though the credit union will have to pay higher
interest payments to depositors in the future.
(c) Is it good news or bad news for the credit union if rates go up?