Hedge Row Bank has the following balance sheet (in millions):

The duration of the assets is six years and the duration of the liabilities is four years. The bank is expecting interest rates to fall from 10 percent to 9 percent over the next year.

(LG 24-2)

a. What is the duration gap for Hedge Row Bank?

b. What is the expected change in net worth for Hedge Row Bank if the forecast is accurate?

Assets $150 Liabilities Equity

$135 15 Total $150 Total $150

c. What will be the effect on net worth if interest rates increase 100 basis points?

d. If the existing interest rate on the liabilities is 6 percent, what will be the effect on net worth of a 1 percent increase in interest rates?AppenduxLO1