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Solution Library
Calculate Leverage Adjusted Duration Gap And Reducing Interest Rate Exposure Of Bank
Question
The numbers provided are in millions of dollars and reflect market values:
|
Cash |
|
20 |
Deposits |
historical avg. maturity = 4 years; historical average duration = 3.5 years |
200 |
|
T-Bills |
30 days (4.5 percent, par) |
50 |
Certificates of Deposit |
avg. maturity = 6 months; avg. duration = 6 months |
150 |
|
T-Bills |
91 days (5.0 percent, par) |
60 |
Short-term Debt |
avg. maturity = 4 years |
150 |
|
Commercial Loans |
avg. maturity = 9.0 years; avg. duration = 7.5 years |
300 |
Long-term debt |
avg. maturity = 15 years; average duration = 12 years |
200 |
|
Consumer Loans |
avg. maturity = 6.0 years; avg. duration = 4.0 years |
200 |
Equity |
|
130 |
|
Mortgage Loans – Fixed rate |
avg. maturity = 30 years; avg. duration = 25 years |
150 |
|
|
|
|
Mortgage Loans - Adjustable |
avg. maturity = 30 years; interest rate reset = 6 months |
50 |
|
|
|
|
Total Assets: |
830 |
Total Liabilities & Equity: |
830 |
||
1. What is the leverage adjusted duration gap of the FI?
a. 3.61 years.
b. 3.74 years.
c. 4.01 years.
d. 4.26 years.
e. 4.51 years.
2. A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by
a. increasing the average duration of its assets to 9.56 years.
b. decreasing the average duration of its assets to 4.00 years.
c. increasing the average duration of its liabilities to 6.78 years.
d. increasing the average duration of its liabilities to 9.782 years.
e. increasing the leverage ratio, k, to 1.
3. What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 4 percent.
a. –27.56 million.
b. –28.01 million.
c. –29.85 million.
d. –31.06 million.
e. –33.76 million.
Summary
These short questions belong to Finance and the questions are about a bank whose assets and liabilities have been given. Questions such as leverage adjusted duration gap of the bank, reducing interest rate exposure, increase of basis points on equity in markets have been answered with calculations.
Total Word Count 85
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