# 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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