Explain why floating rate loans have a low duration (0.5 years in the example above) even though the maturity of the floating rate loans could be very high (for example a 30-year floating rate home loan). Explain for example.

Calculating the duration of a bank's assets and liabilities Assets MV Duration Liabilities MV Duration 400 350 Liquid Securities 150 Investments 100 Floating rate loans 400 Fixed rate loans 350 1,000 0.5 years Deposits 3.5 years Short term CDs 0.5 years Long term CDs 2 years Equity Capital O yrs 0.4 yrs 2.5 yrs 150 100 1,000 150 DA= 1000 x0.5+ 100 400 350 x 3.5+ x0.5+ x2 = 1.325 years 1000 1000 1000 400 DL= 900 350 150 x0+ x 0.4+ -x 2.5=0.572 years 900 900 (i) (ii) Explain why the duration of deposits is equal to 0 years in the table above. Provide an example of how: a. The duration of short-term certificates of deposit can be 0.4 years b. The duration of long-term certificates of deposit can be 2.5 years c. The duration of liquid securities can be 0.5 years d. The duration of investments can be 3.5 years e. The duration of fixed rate loans can be 2 years Explain why floating rate loans have a low duration (0.5 years in the example above) even though the maturity of the floating rate loans could be very high (for example a 30-year floating rate home loan). (iii)