Question

Suppose Fictional Third bank holds an asset portfolio of $200 billion with average duration of 3....

Suppose Fictional Third bank holds an asset portfolio of $200 billion with average duration of 3. Liabilities at Fictional Third bank total $180 billion and have an average duration of 1. Suppose yields rise by one percentage point. What is the value of capital after the increase in yields? Answer in billions of dollars, round to two decimal places, and do not enter a $ sign (Please do step by step).

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Answer #1

1. Value of Assets after increase in yield = Assets * (1 + (- Duration * Change in Yield))

Value of Assets after increase in yield = $200 B * (1 + (- 3 * 1%))

Value of Assets after increase in yield = $200 B * 0.97

Value of Assets after increase in yield = $194 B

2. Value of Liabilities after increase in yield = Assets * (1 + (- Duration * Change in Yield))

Value of Liabilities after increase in yield = $180 B * (1 + (- 1 * 1%))

Value of Liabilities after increase in yield = $180 B * 0.99

Value of Liabilities after increase in yield = $178.20 B

3. value of capital after the increase in yields = $194 B - 178.20 B

value of capital after the increase in yields = $15.80 B (Answer)

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