Consider the following summarised balance-sheet and associated average interest rates of a bank. The bank holds zero-coupon
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Consider the following summarised balance-sheet and associated average interest rates of a bank. The bank holds zero-coupon bonds that have a 4-year maturity with a 7% discount rate. Amounts in the balance-sheet represent current market values.
- Required
- Give two practical recommendations to this bank in terms of minimizing its interest rate risk exposure without changing the size of its balance-sheet.
- Calculate the Macaulay’s Duration for the bank’s bonds.
- Calculate the duration GAP for the bank and the corresponding change in its equity if interest rates were to fall by 3 percentage points.
- Give two practical recommendations to this bank in terms of minimizing its interest rate risk exposure without changing the size of its balance-sheet.
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