The average durations and dollar amounts of assets and liabilities held in Freedom Bank are shown...

 

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The average durations and dollar amounts of assets and liabilities held in Freedom Bank are shown below: Asset and Liability Items Avg. Duration (yrs) $ Amount Cash 0.00 $10 Investment Grade Bonds 12.00 $65.00 Commercial Loans 4.00 $400.00 Consumer Loans 8.00 $250.00 Deposits 1.10 $600.00 Non-deposit Borrowings 0.25 $50.00 a) What is the duration gap? b) What size interest rate change would make the institution insolvent if rates are currently 6%? c) Explain how the bank could change the durations of assets and liabilities to get AE to equal zero to protect the equity value in the event of an interest rate change? The average durations and dollar amounts of assets and liabilities held in Freedom Bank are shown below: Asset and Liability Items Avg. Duration (yrs) $ Amount Cash 0.00 $10 Investment Grade Bonds 12.00 $65.00 Commercial Loans 4.00 $400.00 Consumer Loans 8.00 $250.00 Deposits 1.10 $600.00 Non-deposit Borrowings 0.25 $50.00 a) What is the duration gap? b) What size interest rate change would make the institution insolvent if rates are currently 6%? c) Explain how the bank could change the durations of assets and liabilities to get AE to equal zero to protect the equity value in the event of an interest rate change?

Answer rating: 100% (QA)

To calculate the duration gap we need to find the weighted average duration of assets and liabilities The duration of an item represents the sensitivi... View the full answer