Question

Suppose a bank has $550 million in assets with an average duration of 4.7 and $533 million in liabilities with an average duration of 2.0. What would be the change in bank capital if interest rates were to fall by 0.75%?

Answer 1

Interest rates has fallen by 0.75%.

%age change of assets = (Change in interest rate) * (Duration of Asset)

= 0.75%*4.7 = 3.525% (Positive)

%age change in liabilities = (Change in interest rate) * (Liablities Duration)

= 0.75%*2 = 1.5%. (Positive)

Asset increased by 3.525%*(550) = 19.3875.

Liabilities increased by 1.5%*(533) = 7.995.

Change of capital = 19.3875 - 7.995 = 11.3925 (Positive/Increase)

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