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Calculate Leverage Adjusted Duration Gap And Reducing Interest Rate Exposure Of Bank

Question

The numbers provided are in millions of dollars and reflect market values:

Cash

 

20

Deposits

historical avg. maturity = 4 years; historical average duration = 3.5 years

200

T-Bills

30 days (4.5 percent, par)

50

Certificates of Deposit

avg. maturity = 6 months; avg. duration = 6 months

150

T-Bills

91 days (5.0 percent, par)

60

Short-term Debt

avg. maturity = 4 years

150

Commercial Loans

avg. maturity = 9.0 years; avg. duration = 7.5 years

300

Long-term debt

avg. maturity = 15 years; average duration = 12 years

200

Consumer Loans

avg. maturity = 6.0 years; avg. duration = 4.0 years

200

Equity

 

130

Mortgage Loans – Fixed rate

avg. maturity = 30 years; avg. duration = 25 years

150

 

 

 

Mortgage Loans - Adjustable

avg. maturity = 30 years; interest rate reset = 6 months

50

 

 

 

Total Assets:

830

Total Liabilities & Equity:

830


1. What is the leverage adjusted duration gap of the FI?
    a. 3.61 years.
    b. 3.74 years.
    c. 4.01 years.
    d. 4.26 years.
    e. 4.51 years.

2. A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by
    a. increasing the average duration of its assets to 9.56 years.
    b. decreasing the average duration of its assets to 4.00 years.
    c. increasing the average duration of its liabilities to 6.78 years.
    d. increasing the average duration of its liabilities to 9.782 years.
    e. increasing the leverage ratio, k, to 1.


3. What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 4 percent.
    a. –27.56 million.
    b. –28.01 million.
    c. –29.85 million.
    d. –31.06 million.
    e. –33.76 million.


Summary

These short questions belong to Finance and the questions are about a bank whose assets and liabilities have been given. Questions such as leverage adjusted duration gap of the bank, reducing interest rate exposure, increase of basis points on equity in markets have been answered with calculations.

Total Word Count 85

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Comments

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