The following information is about current spot rates for Mega Savings' assets (loans) and liabilities (CDs). All
Question:
The following information is about current spot rates for Mega Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.
Assets | Liabilities |
1-year loan rate: 7.50 percent | 1-year CD rate: 6.50 percent |
2-year loan rate: 8.15 percent | 2-year CD rate: 6.65 percent |
a. If rates do not change, the balance sheet position that maximizes the FI's returns is?
b. What is the duration of the two-year loan (per $100 face value) if it is selling at par?
c. If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged adjusted duration gap of this position? Use your answer to the previous question.
d. Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points.
e. What is the duration of this Treasury note?
f. If interest rates increase by 20 basis points (i.e., change in Rate = 20 basis points), use the duration approximation to determine the approximate price change for the Treasury note. Briefly discuss.
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer