Suppose the First National Bank of Duluth has $500.00 million in
total assets with an average asset duration of five years. Assume
that the bank’s liabilities are comprised of $86.75 million of
demand deposits and $163.75 million in bonds with a 4.00% coupon
rate (which pays annually) and a five year time-to-maturity. Further
assume that current market interest rates are at 9.00% per
annum.
What is this bank’s duration gap? Is the bank asset- or
liability-sensitive?
The formula for duration gap is,
Where , DGap=Duration gap
DA = Weighted duration of Asset., A = value of assets
DL= weighted duration of liablity L= Value of liability
Given, DA=5 YEARS, DL= 5 Years, A= $500 , L = $86.75 + $163.75= $250.5
Putting the values in formula above
Hence, bank's duration gap = 2.495 years answer.
Since ,the duration gap is positive ,In this situation, if interest rates rise, assets will lose more value than liabilities, thus reducing the value of the firm's equity. If interest rates fall, assets will gain more value than liabilities, thus increasing the value of the firm's equity. Hence,bank is asset -sensitive. Answer.
Suppose the First National Bank of Duluth has $500.00 million in total assets with an average asset duration of five years. Assume that the bank’s liabilities are comprised of $86.75 million of demand...
(2.)Suppose the First National Bank of Duluth has $500.00 million in total assets with an average asset duration offive years. Assume that the bank’s liabilities are comprisedof $86.75 million of demand deposits and $163.75 million inbonds with a 4.00% coupon rate (which pays annually) and a fiveyear time-to-maturity. Further assume that currentmarket interest rates are at 9.00% per annum. (a.)(2 point) Calculate the duration of the bank’s bonds.
(a) A Bank has a bond with a maturity of 4 years. The coupon rate of the bond is 8%, the yield to maturity is 9%, and the face value is 1 million dollars. Interest payment will be paid annually. Determine the price (present value) and duration of the bond. (9 marks) (b) Predict the change in the bond price if interest rates rise by 100 basis points based on the duration of the bond that you have calculated in...