Consider an Asset with a Current Market Value of $250

Multiple Choice

Consider an asset with a current market value of $250 000 and a duration of 3.3 years. Assume the asset is partially funded through zero-coupon bonds which currently sells for $225 000 and has a maturity of 4 years. The current discount rate is 15 per cent and interest rates are expected to increase by 150 basis points. Which of the following statements is true?

A) The current net worth of the position is $25 000 and if interest rates increase the net worth will not be affected.
B) The current net worth of the position is $25 000 and if interest rates increase the net worth will increase, too.
C) The current net worth of the position is $25 000 and if interest rates increase the net worth will decrease.
D) The current net worth of the position cannot be determined, however, if interest rates increase the net worth will increase, too.