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Question
Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.
Market interest rates are expected to increase 1 percent to 11 percent in the next year. If this occurs, what will be the effect on the market value of equity of Allright?
A. -$801,818.
B. -$2,430,909.
C. -$6,529,091.
D. +$2,430,909.
E. +$2,532,727.
Answer
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