Assets	($ million)	Duration (years)
Reserves and cash items	500	0
Securities
Less than 1 year	500	0.4
1 to 2 years	500	1.6
Greater than 2 years	1000	7
Residential mortgages
Variable-rate	100	0.5
Fixed-rate (30-year)	1000	6
Commercial loans
Less than 1 year	1500	0.7
1 to 2 years	1000	1.4
Greater than 2 years	2500	4
Physical assets	5000	0
Totals Assets	13600
Liabilities and Equity
Checkable deposits	1500	2
Money market deposit accounts	500	0.1
Savings deposits	1500	1
CDs
Variable-rate	1000	0.5
Less than 1 year	1500	0.2
1 to 2 years	500	1.2
Greater than 2 years	500	2.7
Overnight funds	50	0
Borrowings		1.3
Less than 1 year	1000	0.3
1 to 2 years	500	1.3
Greater than 2 years	500	3.1
Total liabilities	9050
Equity (K)	4550
Total Liabilities and Equity	13600

From the following data above you are required to measure interest rate risk using the duration model. To complete this task, estimate the portfolio duration of assets and liabilities, and the duration gap, and then apply duration gap analysis to estimate the change in net worth arising from the interest change. (10 marks)

Assume the following:

• All accounts are valued at market.
• All payments are to be made on schedule; there are no assumed defaults, prepayments, or early deposit withdrawals.
• The interest rate on all business loans is initially assumed to be 4 percent and, on all deposits, 2 percent.
• If interest rates change, they are assumed to change by equal percentage points (basis points ) for all securities.
• The current price on IRFs is $95.00 per $100 FV with a contract size of $2,000,000.