Chapter 9: Inerest Rate Risk II Calculating and Using Duration GAP AP P Ay State Bank's balance sheet is listed below. Market yields and durations (in years) are in parenthesis, and amounts are in millions. = -D AP = -D * * P Ay 1+ Assets Liabilities and Equity 1 + Cash $20 Demand deposits $250 Fed funds (1.05%, 0.02) 150 MMDAs (2.5%, 0.50) 360 T-bills (5.25%, 0.22) 300 (no minimum balance requirement) T-bonds (7.50%, 7.55) 200 CDs (4.3%, 0.48) 715 a. What is State Bank's leverage adjusted duration gap? (Compute DA. DL, Leverage adjusted duration Gap) Consumer loans (6%, 2.50) 90 CDs (6%, 4.45) 1,105 b. Use the duration gap model to calculate the change in equity value if the relative change in all market interest rates is an increase [Ay/(1+yin)] of 1.5%. (assume that annual coupon payment, i.e., n =1) C&I loans (5.8%, 6.85) 475 Fed funds (1%, 0.02) 515 c. Use these duration values to calculate the expected change in the value of the assets and liabilities of State Bank for a predicted increase of 1.5 percent in interest rates. Fixed-rate mortgages (7.85%, 19.50) 1,200 Commercial paper (3%, 0.45) 400 Here, Changes in y (i.e., Ay) = 1.5% increase Variable-rate mortgages, Subordinated debt: d. What is the change in equity value forecasted from the duration values for a predicted increase in interest rates of 1.5 percent? repriced @ quarter (6.3%, 0.25) 580 Fixed-rate (7.25%, 6.65) 200 TIPs for c & d: Premises and equipment 120 Total liabilities $3,545 It would be best if you computed AMVA, AMVL, and then AMVE = AMVA - AMVL; for example, estimating each individual asset's market value changes, and adding them up would give you AMVA. Use AP formular above. Equity 400 Total assets $3,945 Total liabilities and equity $3,945