Please answer the following questions correctly. Thank you Consider a bank with

Question

Please answer the following questions correctly. Thank you

Consider a bank with the following balance sheet: ASSETS VALUE DURATION LIABILITIES VALUE DURATION Cash 5-yr Loan @ 5% 4-yr Loan @ 6% $10,000 5,000 5,000 0 3 2 4-yr Bond LIBOR 3-yr Bond @ 5% 6-yr Bond @ 6% $3,000 5,000 2,000 2 What is the bank's duration gap (in years)? Answer: A bank with a negative duration gap could mitigate it's risk by: Select one a. Entering into a fixed-for-variable interest rate swap for term loans with greater than 1-year maturity b. Selling assets to convert to cash. c. Seeking more cash deposits from customers d. a and b e. a and c f. b and c g. a, b and c. O "Liquidity gap" is the difference between a financial institution's assets and liabilities, caused by assets and liabilities not sharing the same liquidity properties. Select one True False

Explanation / Answer

1

Duration gap=duration of assets-liabilities/assets*duration of liabilities=1.25-0.5*2.3=0.10 years

Duration of assets=1.25

Duration of liabilities=2.3

2

as duration gap is negative means duration of assets*assets<liabilities*duration of liabilities

Hence a and c

3

True

4

100 million more assets and they would go down with rate increase by 100*1%=1 million

Hence option A

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---