Question

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 the expected change in net worth for Hedge Row Bank if the forecast is accurate? (Enter your answer in millions rounded to 3 decimal places. (e.g., 32.161))

Expected change in net worth

$ million

c.	What will be the effect on net worth if interest rates increase 100 basis points? (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 3 decimal places. (e.g., 32.161))

Expected change in net worth

$ million

d.

If the existing interest rate on the liabilities is 6 percent and that on the assets is 10 percent, what will be the effect on net worth of a 1 percent increase in interest rates? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. (e.g., 32.1616))

Expected change in net worth

$ million

Answer 1