Question: Question 5 (6 marks) Table 2 illustrates a hypothetical balance sheet of an imaginary bank. Table 2. Hypothetical balance sheet of an imaginary bank

Question 5 (6 marks) Table 2 illustrates a hypothetical balance sheet of

Question 5 (6 marks) Table 2 illustrates a hypothetical balance sheet of an imaginary bank. Table 2. Hypothetical balance sheet of an imaginary bank Asset Value Interest Modified Liability Value Interest Modified ($ mil) rate (%) duration and ($ mil) rate (%) duration equity Cash 1,000 0 0 Deposits 9,000 3 0 Loan 10,000 6 4.47 Bonds 3,000 4.5 3.74 T-bills 4,000 5 1 CDs 2,200 4 1.96 Total 14,200 1.094 Equity 800 3.25 Total 15,000 Total 15,000 (a) Calculate the duration of the bank's equity. [1 mark] (b) To immunize the bank's balance sheet from interest risk, the risk manager decides to increase the liability duration by reducing the dependence on deposits and holding more bonds. Show how the risk manager can achieve an immunization from interest risk. Suggested formula: DEquity =DAsset-Liabilities Ass Ass-Liab DAsset Liab Ass Liab DLiabilities Amount to Exchange = Change in Portfolio Duration x Portfolio Value Change in Asset Duration [5 marks]

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Plot the point whose cylindrical coordinates are given. Then find the rectangular coordinates of the point. (a) 4 2 2 (x, y, z) (b) 4, -2 4 x , y , Z =Change from rectangular to cylindrical...

Language Development and Communication Digital Presentation: K-Grade 3/Age 8 slide digital presentation about speech and language development in children in K-Grade 3 (ages 5-8) that could be shared...

What makes an experimental study reliable and valid? Are the measures used in Darley and Latane's (1968) study, Bystander Intervention in Emergencies: Diffusion of Responsibility, reliable and valid?...

Mind solving should show you got your answers 31. As a mid-size company, you have a pension plan which pays out $10 million a year forever. The first payment is exactly one year from now. The term...

It is becoming widely expected that interest rates will rise in the coming year. In recent weeks the 10 year US bond has risen from about 1.50% to 1.80%. Using the appendix for chapter 2 on Webster...

Please read the article and answer about questions. Why Accounting Matters to Small Business The way many people think of it, what makes a business businesslike is its focus on making money, and in...

Tax Return Problem: Partnership Instructions: Please complete the required federal partnership income tax return forms for AAA Fast Plumbing for the 2014 tax year based upon the facts presented...

i need a solution of computional problems i really need help on those. Chapter 15Leases MULTIPLE CHOICE 1. Generally accepted accounting principles require that certain lease agreements be accounted...

Adjustments to the Trial Balance. Using Clarabel case scenario (Lectures 4,5, and 6) and other examples produce your own case study where you draw up an imaginary businesss Trial Balance (as at...

4 No guestions will be entertained by the professor during the exam. If there is anything unclear or any information missing write down your VALID assumption(s) as part of your solution Provide...

A random sampling of a company's monthly operating expenses for n = 36 months produced a sample mean of $5474 and a standard deviation of $764. Find a 90% upper confidence bound for the company's...

Alon is a retired Doctor. His wife Nancy is a retired Social Worker. Both wish to remain active and they invest in a gift shop that is to be managed by their daughter Heather, who is aged 35. They...

Question Evaluate the indefinite integral. - 7 l o g 2 ( x ) d x Provide your answer below: - 7 l o g 2 ( x ) d x =

3. b. Consider the below model & state which 3PL partner you should go ahead with. The rating parameter is 1-5 (5 is highest & 1 is the lowest). 20Marks The above question contains 20 marks. As per...

C. Melinda Scholer has spent the last few weeks determining inventory costs for TOCO, a toy manufacturer located near Taos, New Mexico. She knows that annual demand will be 20,000 units per year and...

Answer the following question c) Express (/3 i) in polar form.

GRADUAL LIQUIDATION In practice, it is not always possible to sell the assets within a relatively short period after the dissolution of the partnership. The partners can then decide to liquidate the...

Q.3: find the sum of the following series: k 1.Ek=1 k%3D1 1 2.2k=2 1 - k-1 k+1 7 3.L(-1)k-1 Zk%3D1 6k-1 4.2 In(1 2k=2 In(1 k2 - 1 5.2n=2 n+2 100 - n+4 1 6.2k=12k - 2k+1

Design a minimum-mass symmetric three-bar truss (the area of member 1 and that of member 3 are the same) to support a load P, as was shown in Fig. 2.9. The following notation may be used: Pu = P cos...

Mutual funds, again. From the 64 mutual funds in Exercise 21 with quarterly returns that are well modeled by a Normal model with a mean of 2.4% and a standard deviation of 5.6%, find the cutoff...

Human resource testing, again. For the IQ test administered by human resources and discussed in Exercise 22, what cutoff value would separate the a) lowest 0.15% of all applicants? b) lowest 16%? c)...

Stock prices. For the 900 trading days from January 2003 through July 2006, the daily closing price of IBM stock (in $) is well modeled by a Normal model with mean $85.60 and standard deviation...