Question: X Bank holds Assets and Liabilities whose average durations and dollar amounts are as shown in the following table: Asset and Liability Items Avg. duration

  1. X Bank holds Assets and Liabilities whose average durations and dollar amounts are as shown in the following table:

Asset and Liability Items

Avg. duration in years

Dollar amount in millions

Investment Grade Bonds

10

$50

Non-deposit Borrowings

0.10

20

Consumer Loans

7

250

Commercial Loans

4

400

Deposits

1.10

600

Subordinated Notes

2.80

80

Treasury Bonds

8.25

120

  1. Calculate the weighted-adjusted duration of Xs assets portfolio and liability portfolio.
  2. What is the leverage-adjusted duration gap?
  3. If the ALM team speculatively take this position, what do you think their expectations are regarding the future market rates?
  4. What happens to the net worth of the bank if the interest rates increase from 6% to 7%?

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