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