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

Book ValueMarket Value

AssetsAmountAmountDuration

T-bills$360$ 3600.50

Loans*10,000_____________

Total Assets10,360_______

Liabilities

Deposits8,3688,3680.50

Total Liabilities8,3688,368

Equity1,992_______

Total Lia and NW10,360_______

*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 aninterest 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 theleverage-adjustedduration gap?Is Angus State Bank exposed to interest rate risk? Is itexposed if interest rate increase or decrease?

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

d. What is the forecasted impact on the market value of equity caused by a relative 1.5 percent upward shift in the entire yield curve? [i.e.,Dr/(1+r) = 0.0150]?

The market value of the equity will change by the following:

MVE=-DG * (A) *r/(1 + r) =

e.What variables are available to the financial institution to immunize or at least reduce interest rate risk exposure on the balance sheet?Taking one variable at a time, how much would each variable need to change to get DGAP equal to 0?

To immunize the institution for interest rate risk, the Leverage Adjusted DG needs to be zero:

Hint:DG = D_A-kD_L= 0