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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Solution to Stage Nine

1:

Part one solution

With R = 14%, the present value of expected cash flows is equal to the present value of cash flows in Year One (certain cash flows as there is no risk of default in Year One) and the present value of expected cash flows in Year Two (uncertain cash flows as there is a risk of default in Year Two).

The present value of expected cash flows = 8.01 > 6 (equity invested). Value is being created with a loan priced at 14%.

2: Part two solution

Net loan value = 5.77 ...

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