Question

Stillwater Bank reports an average asset duration of 3.25 years and an average liability duration of 1.75 years. Liabilities are $485 million, while assets total $512 million. Suppose that interest rates are 6% but rise to 7.5%. What will happen to Stillwater's net worth if interest rates rise?

		+$720 million
		+$208 million
		- $7.56 million
		-$11.5 million

Answer 1

Given,

Asset duration = 3.25 years

Liability duration = 1.75 years

Assets = $512 million

Liabilities = $485 million

Interest rate rises from 6%(0.06) to 7.5%(0.075)

Solution :-