Question

Suppose that the market value of Chase bank net worth increased by 2% as a result...

Suppose that the market value of Chase bank net worth increased by 2% as a result of a decline in the interest rate from 5% to 4.75/%. The bank’s liabilities to assets ratio= 0.75. The bank’s assets duration =2 years. What is the bank’s duration gap?

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Answer #1

Following formulas are used:

where, denotes the %change in the net worth = 2%

2% = -DURgap * Change in interest rate/(1 + interest rate)

2% = -DURgap * (4.75% - 5%)/(1 + 5%)

2% = -DURgap *(-0.25%)/(1.05)

DURgap = 2%*1.05/0.25%

DURgap = 8.40 years

Please comment in case of any doubts or clarifications required

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