Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.

Given the estimates of duration in problem 27, how should the Friendly Finance Company alter the duration of its liabilities to immunize its net worth from interest-rate risk?

Data From Problem 27

If the manager of the Friendly Finance Company revises the estimates of the duration of the company's assets to two years and liabilities to four years, what is the effect on net worth if interest rates rise by 3 percentage points?

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Cash and deposits Securities Assets Less than 1 year 1 to 2 years Greater than 2 years Consumer loans Less than 1 year 1 to 2 years Greater than 2 years Physical capital Total Friendly Finance Company $3 million $5 million $1 million $1 million $50 million $20 million $15 million $5 million $100 million Liabilities Commercial paper Bank loans Less than 1 year 1 to 2 years Greater than 2 years Long-term bonds and other long-term debt Capital Total $40 million $3 million $2 million $5 million $40 million $10 million $100 million