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A bank has DA = 2.5 years, DL= 0.80 years, and k = 92%. Assets are...

A bank has DA = 2.5 years, DL= 0.80 years, and k = 92%. Assets are equal to $1,200 million. According to the duration gap model, find the change in the direction and magnitude of interest rate that would make the institution insolvent if rates are currently 5 percent?

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Answer #1

The direction is positive and magnitude is 4.76%

F A B C D E 1 DA 2.5 2 DL 0.8 3 k 92% 4 Assets 1200 5 interest rate 5% 6 7 The duration gap (DA-k.DL), the larger the gap the greater the value change 8 9 Step 1: Asset*K -96 10 Step 2: (DA-k.DL) -1.764 11 Final calculation of Change in rate 0.047619 or 4.762% 12 13

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