Problem 3 Consider Lecture 3 Slide 41 (reproduced below): Calculating the duration of a bank's assets and liabilities Assets MV MV Duration 400 Duration Liabilities 0.5 years Deposits Short term CDs 0.5 years Long term CDs Equity Capital Liquid Securities 150 Investments 100 Floating rate loans 400 Fixed rate loans 1,000 3.5 years 350 150 O yrs 0.4 yrs 2.5 yrs 350 2 years 100 1,000 x3.5+ 150 DA 100 x0.54 400 350 1000 x0.5+ 1000 x 2-1.325 years 1000 1000 400 350 DL= 150 x0+ -x0.4+ -x 2.5=0.572 years 900 900 900 (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 The duration of liquid securities can be 0.5 years e o Problem 3 Consider Lecture 3 Slide 41 (reproduced below): Calculating the duration of a bank's assets and liabilities Assets MV MV Duration 400 Duration Liabilities 0.5 years Deposits Short term CDs 0.5 years Long term CDs Equity Capital Liquid Securities 150 Investments 100 Floating rate loans 400 Fixed rate loans 1,000 3.5 years 350 150 O yrs 0.4 yrs 2.5 yrs 350 2 years 100 1,000 x3.5+ 150 DA 100 x0.54 400 350 1000 x0.5+ 1000 x 2-1.325 years 1000 1000 400 350 DL= 150 x0+ -x0.4+ -x 2.5=0.572 years 900 900 900 (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 The duration of liquid securities can be 0.5 years e o