Question

# Suppose you are the manager of a bank whose \$120 billion of assets have an average...

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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We calculate the value of assets as:

= 120B*0.5%*5 = 3B

There is an asset increase of 3 billion

Change in liabilities can be calculated as

= 90B*0.5%*7 = 3.15B

Liabilities increase by 3.15 billion

From above the net worth of the bank can be computed as the liabilites increase by \$0.15 billion

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