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Financial Institutions: Average duration of assets, of liabilities, interest rate exposure

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Use the attached balance sheet information to answer this question.

a. What is the average duration of all the assets?
b. What is the average duration of all the liabilities?
c. What is the FI's leverage-adjusted duration gap? What is the FI's interest rate risk exposure?
d. If the entire yield curve shifted upward 0.5 percent (i.e., Î"R/(1 + R) =.0050), what is the impact on the FI's market value of equity?
e. If the entire yield curve shifted downward 0.25 percent (i.e., Î"R/(1 + R) = â?'.0025), what is the impact on the FI's market value of equity?

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Solution Summary

The average duration of assets, liabilities and interest rate exposures are examined.

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Answer:
Given that,
Balance Sheet ($ thousands) and Duration (in years)
Duration Amount
T-bills 0.5 90
T-notes 0.9 55
T-bonds 4.393 176
Loans 7 2,724
Deposits 1 2,092
Federal Funds 0.01 238
Equity 715

Now,
Categorizing asset and Liabilities in the balance sheet:
Balance Sheet ($ thousands) and Duration (in ...

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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