Question: a) What should be the duration gap for complete protection against interest rate risk? b) What is a compensating balance? c) If RSA = $32

a) What should be the duration gap for complete protection against interest rate risk?

b) What is a compensating balance?

c) If RSA = $32 million and RSL = $49.5 million, what would be the change in income if interest rate rises from 5% to 10%?

d) If the duration of assets is 1.16 and duration of liabilities is 2.77, how much change in net worth will take place because of a fall in interest rate from 10% to 5%? Assume the assets equal to $100m and liabilities equal to $90m.

e) Why would a bank decline a loan even if the borrower is willing to pay a high interest rate?

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