Question

Market Value Market Value Duration (Years) Assets Rate Rate Liabilities Duration and (Years) Equity Time Deposits 2.50 CDs 5.00 Equity 4% 6% 1.25 3.00 Cash Loans T-Bonds Total $ $ $ $ 150 675 175 1,000 10% 5% $ $ $ 500 400 100 1,000 Use the following bank information for questions a) – e). a) What is the weighted average duration of assets? b) What is the bank's duration gap? c) What is the bank's weighted average cost of liabilities? d) What is the bank's expected economic net interest income? e) If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?

Answer 1

Pageno Answer: a) The weighted average duration of aşgetş. Amount ! Duration Weight Durationx weight Particularl_ C$) cash $150 lo lous oxols=0 Loans | $695 2.5 0.675 12.5x0.675=.69 T- Bonds $ 145 5 0.175 5x0.145=0.88 $ 1000 2.56 The weighted average duration of a se ta = 2:56 years b) The bank duration gap? The weighted average duration of liabilitex Particulars Amount Duration weight Duration x Height 1.25X0.555556 500 Tras Deposits 0-555556=0.69 1.25 CDS 400 3000 uute u 3:00 XD.uuuuu 123 2.03 $900 hleighted average Duration of liabilities = 203 years

Page no Banks duration Gap (2.56-2003) = 0.53 years c) The bank taleighted average The bank baleighted average cost of liabilities, Weight | Rate of Intrest y Rate of Amourd I WEIGHT Porticulos Intrest - 47. X 05S56 Time of l an. I soo 6.555561 = 2.22 Deposits 64. Youuuuu COS | 64. 400 0.49444 = 2.67 900 4.89 kleighted average cost of liabilities = 4.894 . d) The bank expected economic. net interest income Panticulors Amount)Lamount.cs) Intouston INCOME L Loan 67.5 1 Intrust on i I- Bonds 8.75. 146.25 Intrest on EXPEN 20 Time Deposits ŞES TIntrest on 2u Coş

Pageno Expected Economic Net Intrest Income -76.25-44.00 = $ 32.25 Economic Value of Equity = 100+ 32:25 =132.25 = $132.25 The expected change in the Economic value of Equity. INCOME Particulares Amount.cdAmountco Intrest on loant tu.as. Intrestont 10.5. Bonds 84.75 Intrest on TIME |_ Deposita Intrest on Ches 53:00 as 28 Expected Economic Net Intrest income- 84.75-53.00 = $31.75 Economic value of the Equity = 100+ 31.45 = $131.75 change in Economic value of Equity = 132.25-131-75 sa =0.50