Question

The duration of the assets of your bank is 5.3 years and the duration of your...

The duration of the assets of your bank is 5.3 years and the duration of your liabilities is 2.1 years. Your bank has $320,000 in assets, $300,000 in liabilities and $20,000 in equity. Suppose the current fed funds rate is 2% and the Fed decides to increase the interest rate by 50 basis points. What is the new equity value of your balance sheet?

Homework Answers

Answer #1

Assets: Asset Value = $ 320000 and Duration = 5.3 years

Change in Fed Funds Rate = 0.5 %

% Change in Asset Value = - Duration x % Change in Fed Funds Rate = - 5.3 x 0.005 = - 0.0265 or - 2.65 %

New Value of Assets = (1-0.0265) x 320000 = $ 311520

Liabilities: Liability Value = $ 300000, Duration = 2.1 years

Change in Feds Fund Rate = 0.5 %

% Change in Liability Value = - Duration x % Change in Feds Fund Rate = - 2.1 x 0.005 = - 0.0105 or - 1.05 %

New Liability Value = (1-0.0105) x 300000 = $ 296850

Initial Equity Value = $ 20000

New Equity Value = 311520 - 296850 = $ 14670

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