Pacific Bank holds assets and liabilities as follows:

Assets

Amount

(million)

Duration

Liabilities

Amount

(million)

Duration

Business loans

750

4.4

Savings deposits

1,345

0.20

Personal loans

385

0.8

Time deposits

620

1.20

Mortgage loans

615

9.8

Average interest rate = 4.5%

Average interest rate = 2%

1. Calculate the net interest income of Pacific Bank.
2. Calculate the dollar-weighted duration of Pacific Bank’s assets?
3. Calculate the dollar-weighted duration of Pacific Bank’s liabilities?
4. Based on the results of part B and part C above, is the duration of the bank’s assets longer or shorter than the duration of its liabilities? Do you expect banks in general to have the same situation in the durations of their assets and liabilities? Explain.
5. The average interest rates of Pacific Bank’s assets and liabilities are expected to rise by 1%. Explain mathematically what problem could arise if the senior management of Pacific Bank does not do anything about the difference in the duration of the assets and the liabilities. Show your calculations.
6. Western Bank’s total asset value is $1,450 million and the total liability value is $1,660 million. The bank’s asset duration is 7.68 years. It would like to adjust the asset duration to 2.13 by using the Treasury Bond futures below. How many of the futures contracts should Western Bank buy or sell?

Maturity	July 2022
Price	132’23
Face value	$100,000
Duration	8.87

Answer rating: 100% (QA)

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