Bank NYC has the following balance sheet in market value:

Assets (mil$)		Liabilities (mil$)
Cash	20	Demand Deposits	60
Loans	100	1-yr Debt	50
		Equities	10
Total Assets	120	Total Liab. & Eqt.	120

Further information: (1) There is no default risk in both the 3-yr loans and the 1-yr Debt. (2) The 1-year Debt is a zero-coupon debt with yield 5%. 9 BF2210 Bank Risk Management Homework 1 2020 (3) In questions (a)-(f), assume that the 3-year Loan is a non-amortizing fixed coupon loan, which pays 10% coupon each year. The payment is made once per year. Currently this loan is priced at par.

A) Which is the (leveraged adjusted) modified duration gap of this bank? (4 marks)

B) If the market interest rate is expected to increase by 0.5% for all maturities, what is the expected impact on the banks net worth? (2 marks)

C) Suppose instead of a coupon loan, the 3-year Loan is an annually amortizing loan. That is, the borrowers of this loan will pay the bank equal payment each year (NOT monthly) throughout the life of this loan. The interest rate the bank charges on this loan is still 10% and the market value of this loan is still 100 mil$. What is the modified duration of this amortizing loan? (4 marks)