Balance sheet of a bank is as follows:

Assets (in millions), Total Assets = $500

Cash $20 (rate: 0%, D=0)

Bonds $80 (rate: 7.2%, D=1.8 years)

Commercial loans $400 (rate: 11%, D=1.5 years)

.

Liabilities (Total Liabilities = $450) & Equity ($50) (in millions)

Small time deposits $100 (rate: 3.6%, D=4.0 years)

Large CDs $50 (rate: 6.3%, D=1.0 year)

Transaction accounts $300 (rate: 2.8%, D=3.3 years)

Equity $50

.

The adjusted duration gap of the bank is -1.392 years.

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Assume that the current yielding rate R is 9%. If all market interest rates fall by an average of 1.5%, market value of equity will:

1. increase by $9.578.
2. decrease by $9.578.
3. increase by $8.62.
4. decrease by $8.62.
5. None of them is correct.

Dollar duration:

1. indicatesthe percentage change in the price of a security for a one percent change in the return on the security
2. indicates the dollar value change in the price of a security to a one percent change in the interest rate
3. indicates thepercentage changein the price of a security to a one percent change in the interest rate
4. All of the above

Modified duration:

1. estimates when embedded options will be used.
2. directly indicates how much the price of a security will relatively change given a change in interest rates.
3. is always greater than maturity.
4. All of the above
5. A and B