1. You are asked to determine the market value (mark-to-market) balance sheet for Blackburn State Bankand loan duration (amounts in $ thousands and duration in years):

Book Value Market Value

Assets Amount Amount Duration

T-bills $ 360 $ 360 0.50

Loans* 10,000 _______ ______

Total Assets 10,360 _______

Liabilities

Deposits 8,368 8,368 0.50

Total Liabilities 8,368 8,368

Equity 1,992 _______

Total Lia and NW 10,360 _______

*Since this is a simple bank, it has only one type of loan. The loan has a $10,000 book value (current outstanding principal), amortized loan with annual payments, an interest rate of 6.5 percent, and 20-years to maturity. Similar amortized loans today (market interest rate for similar loans) have an interest rate of 7 percent which, is the market yield.

a. Using Excel, determine the market value and duration of the loan and fill in the blanks in the balance sheet above. Please include a copy of your Excel Spreadsheet with your completed exam (you can copy and paste as a picture).

b. What is the average duration of all the assets and what is the average duration of all the liabilities?

Average Duration of Assets:

Average Duration of Liabilities:

c. What is the leverage-adjusted duration gap? Is Angus State Bank exposed to interest rate risk? Is it exposed if interest rate increase or decrease?

Leverage-adjusted duration gap (DG) = DA kDL=