Question 9 (3 Marks)

The following balance sheet information is available for a U.S. financial institution:

Assets			Liabilities & Equity
Item	Amount ($)			Item	Amount ($)
Cash	90			Deposits	2,130
T-bills	120			Federal funds	260
T-notes	80			CDs	120
T-bonds	190			Equity	770
Loans	2,800
				Total (L)	2,510
Total (A)	3,280			Total (L+E)	3,280

a) If the combined weighted duration of T-bills, T-notes and Loans is 8 years, and the duration of the T bond portfolio is 11.2 years, what is the weighted average duration of all the assets? (1 mark)

b) If the weighted average duration of all liabilities is 1.2137 years, what is the FIs duration gap? (0.5 marks)

c) If the current market interest rate is 7% and rates rise to 8%, by how much will equity change (in dollars) and what will the new level of equity be? (0.5 marks)

d) Given your answer to part c), and using an appropriate ratio, comment on the insolvency risk of the institution and a defensive action it could take. (1 mark)