Question

Suppose your firm has $500,000 in liabilities and $1,500,000 in assets. You find out that the duration of assets is 6.4 years and the duration of liabilities is 4.5 years. The interest rate is currently 10%. If interest rates suddenly fluctuated and the value of your firm’s equity were to decrease by $120,000, what is the new interest rate in the market?

1.8% |
||

8.2% |
||

11.2% |
||

11.8% |
||

None of the above. |

Answer #1

You calculate that the duration of your assets of your bank is
5.6 years and the duration of your liabilities is 4.2 years. You
currently have $70 million in liabilities and $5 million in equity.
The interest rate is currently 4%. Calculate the change in net
worth if interest rates decrease by 20 basis points.
242,703.69
-242,307.69
2,423,076.92
-2,423,076.92
None of the above

6. Your firm currently has net income to common equity of
$1,500,000 and a dividend payout of 30%. If the firm’s return on
assets is 10% and the return on equity is 8%, at rate of growth
will dividends grow if the stock is currently publicly traded?

The duration of the assets of your bank is 5.3 years and the
duration of your liabilities is 2.1 years. Your bank has $320,000
in assets, $300,000 in liabilities and $20,000 in equity. Suppose
the current fed funds rate is 2% and the Fed decides to increase
the interest rate by 50 basis points. What is the new equity value
of your balance sheet?

Hedge Row Bank
has the following balance sheet (in millions):
Assets
$170
Liabilities
$102
Equity
68
Total
$170
Total
$170
The duration of the
assets is 7 years and the duration of the liabilities is 5.2 years.
The bank is expecting interest rates to fall from 10 percent to 9
percent over the next year.
a.
What is the duration
gap for Hedge Row Bank? (Round your answer to 2 decimal
places. (e.g., 32.16))
Duration gap
years
b.
What is...

1. Define adverse selection.
2. Assets = $100 million, Liabilities = $70 million, Average
asset duration = 3 years, Average liability duration = 2 years.
Suppose the interest rate decreases by 4%. What will be change in
net worth (in dollar)?
3.Explain how price level affects exchange rates in the long
run?
4.Do the duration analysis based on the following
information.
5.If a bank’s liabilities are $90 million and assets are $70
million, calculate the change in bank profit in...

Question 1
The relationship that exists on a balance sheet is:
Assets = Liabilities – Equity.
None of the above
Assets = Liabilities + Equity.
Liabilities = Assets + Equity.
If a company generates positive net income, all else equal, cash
will
Uncertain – Insufficient information
Increase
Stay the same
Decrease
Question 3
If a “typical” firm reports a $20 Million dollars of retained
earnings on its balance sheet, could its directors declare a $20
million dollar cash dividend...

Amex bank reports an average asset
duration of 7 years and an average liability duration of 4 years.
The bank recorded total assets of $1.8 billion and total
liabilities of $1.5 billion. If the interest rates began at 6
percent and then suddenly dropped at 5 percent, what change will
occur in the value of Amex’s net worth? Logically explain your
result in detail.
Now, suppose the interest rate is 6
percent and moves up by 1 percent; keeping everything...

You have been hired as a risk manager for Acorn Savings and
Loan. Currently, Acorn's balance sheet is as follows (in millions
of dollars): Assets Liabilities Cash reserves 49.8 Checking and
savings 79.5 Auto loans 98.1 Certificates of deposit 101.3
Mortgages 147.2 Long-term financing 94.8 Total Assets 295.1 Total
liabilities 275.6 Owner's equity 19.5 Total liabilities and equity
295.1 When you analyze the duration of loans, you find that the
duration of the auto loans is 2.1 years, while the...

Money Market deposit accts. = $7; Fixed rate CD’s = $6; Treasury
notes = $8; Fed Funds lending = $2; Savings Deposits = $2; Fixed
rate loans = $17; Discount loans = $1.5; Reserves = $2.5; Equity
Capital = $7; Treasury-bills = $9; Variable rate CD’s = $16; Fed
Funds borrowing = $4; Demand deposits = $3; Variable rate mortgage
loans = $8
A. Develop a balance sheet from the above data into assets and
liabilities with a correct division...

Suppose you are the manager of a bank whose $120 billion of
assets have an average duration of five years and whose $90 billion
of liabilities have an average duration of seven years. Conduct a
duration analysis for the bank, and show what will happen to the
net worth of the bank if interest rates fall by 50 basis points
percentage points from 6% to 5.50%. What actions could you take to
reduce the bank’s interest-rate risk?

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