Silicon Valley Bank has the following balance sheet (in millions): Assets $200 Liabilities $165 Equity 35 Total
Question:
Silicon Valley Bank has the following balance sheet (in millions):
Assets $200 Liabilities $165
Equity 35
Total $200 Total $200
The duration of the assets is five years and the duration of the liabilities is four years. The interest rate on both the assets and the liabilities is 9 percent. The bank is expecting interest rates to fall from 9 percent to 8 percent over the next year.
a. What is the duration gap for the bank?(2 marks)
b. What is the expected change in net worth for the bank if the forecast is accurate?(2 marks)
c. What will be the effect on net worth if interest rates increase 50 basis points?(2 marks)
d. If the existing interest rate on the liabilities is 6 percent, what will be the effect on net worth of a 1 percent increase in interest rates?
Expert Answer:
a To calculate the duration gap we need to subtract the duration of the liabilities from the duratio... View the full answer
