Titan Bank's Balance Sheet

Assets$1,100

Assets have a yield-to-maturity of 5.00%

Liabilities$1,010

Liabilities have a yield-to-maturity of 2.50%

Equity$90

Titan Bank owns only two assets, $675 in a consumer loan with a duration of 2.20 years and $425 in a Treasury bond with a duration of 4.00 years. Titan Bank has the following liability schemes to choose from:

AmountDuration (years)

Scheme ATime deposit$6103.80

Large CD4001.50

Scheme BZero coupon CD$4004.00

Time deposit5003.80

Large CD1101.50

Scheme CZero coupon CD$2004.00

Small time deposit4603.80

Large CD3501.50

6.What is the duration of the assets?

7.If Scheme A is used, what is the duration of the liabilities?

8.If Scheme B is used, what is the duration of the liabilities?

9.If Scheme C is used, what is the duration of the liabilities?

10.If the bank is 100 percent certain there will be an interest rate shock of +300 basis points, what scheme will maximize shareholders post-shock wealth? 

Answer rating: 100% (QA)

To determine the duration of the assets and liabilities and identify the scheme that ... View the full answer