Question

John is using the data from the balance sheet of a bank to determine its duration gap using the simple approach discussed in class. He collected the information below that covers all assets and liabilities in the bank’s balance sheet.

Assets

Value ($Millions); Duration (Years)

Loans 170; 4.0

Securities 60; 3.2

Other Assets 20; 0.3

Liabilities

Value ($Millions); Duration (Years)

Deposits 190; 1.0

Other Borrowings 30; 2.0

Using this information and simple approach to measure the duration of assets and liabilities, estimate the duration of assets, liabilities, and the duration gap for the bank.

Answer 1

Duration of assets
Asset	Amount	Duration	Amount*Duration
loan	170	4	680
security	60	3.2	192
other assets	20	0.3	6
Total	250		878
Asset duration	3.51	(878/250)
Duration of liabilities
Liabilities	Amount	Duration	Amount*Duration
deposits	190	1	190
other borrowings	30	2	60
Total	220		250
Liabililty duration	1.14	(250/220)
Duration gap=	Duration of asset- ((liability/asset)*Duration of liability))
	3.51-((220/250)-1.14)
	3.77