Question

AI BICID 1 Bank 2 2 Assets Market Value Rate Duration 3 0% 1.8 4 Cash 5 Bonds 6 Commercial Loans 7 Total Assets 8 Liabilities and Equity 33,000 110,000 400,000 593 009 7.20% 11% 1.5 9 10 Small Time Deposits 125,000 3.60% 11. Large CD's 85,000 6.30% 12 Transactions Account: 253,000 2.80% 3.3 13 Equity 80,000 14 15 Ata Wayne 16 Calculate the Banks Duration Gap annat 17 Calculate the Change in the Banks Economic Value of Equity

Answer 1

Duration Assets = (Bonds / Total Assets)* Duration Bond + (Commercial Loan/ Total Assets)* Duration Commercial Loan

Duration Assets = (110,000/543,000)*1.8 + (400,000/543,000)*1.5 = 1.4696

Duration Liabilities = (Small time deposit / Total Liabilities)* Duration Small time deposit + (Large CDs / Total Liabilities)* Duration Large CDs + (Transaction Accounts / Total Liabilities)* Duration Transaction account

* (Liabilities does not include equity)

Duration Liabilities = (125,000 / 463,000)*4 + (85,000 / 463,000)* 1 + (253,000 / 463,000)* 3.3 = 3.0667

Duration Gap = Duration Assets - (Liabilities/ total assests)*Duration Liabilities = 1.4696 - (463,000 / 543,000)*3.0667 = - 1.1453

Change in Economic value of equity = - Duration Gap $\left [ \frac{\Delta y}{1+y} \right ]$ * Matket value of assets = - (-1.1453)* (0.01/1.11)*543,000 = $5402

(General level of interest rate is 11% ie of commercial loan)