Question

The following information is provided for Tweed Bank. (in Millions of Dollars)

Cash                                                              = $ 75

Loan M (4%, 4 years)                           = $250  

Total Assets                                              = $325  

Deposit N (2 years, 2%)   = $ 300

Equity                                        = $   25

Total Liabilities                    = $ 325

1. Estimate the durations of Loan M and Deposit N. (In Years)

D(Loan)=                         and D(Deposit) =

Year	CF	PV factor	PV	PV*n	PV*n*n+1
1
2
3
4
Total

Duration (Loan)=

Year	CF	PV factor	PV	PV*n
1
2
Total

Duration (Deposit)=594.1368/300=1.9804

b. Using the duration formula estimate the change in the value of the equity if interest rates are expected to decrease by 1%.

Answer 1

Loan 4% for 4 years
	Loan amount = $ 250
	yr	CF	PVF @ 4%	CF * PVF	proportion	Duration
	1	10	0.962	9.615	0.038	0.038
	2	10	0.925	9.246	0.037	0.074
	3	10	0.889	8.890	0.036	0.107
	4	10	0.855	8.548	0.034	0.137
	4	250	0.855	213.701	0.855	3.419
				250	1	3.775
	Duration = 3.775 years
	Deposit amount = $ 300
	Time and Rate 2 years & 2%
	yr	CF	PVF @ 2%	CF * PVF	proportion	Duration
	1	6	0.980	5.882	0.020	0.020
	2	6	0.961	5.767	0.020	0.039
	3	300	0.942	282.697	0.960	2.881
				294	1	2.940

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