Calculating the duration of a bank's assets and liabilities Duration Oyrs 0.4 yrs 2.5 yrs Assets MV Duration Liabilities MV Liquid Securities 150 0.5 years Deposits 400 Investments 100 3.5 years Short term CDs 350 Floating rate loans 400 0.5 years Long term CDs 150 Fixed rate loans 350 2 years Equity Capital 100 1,000 1,000 100 400 DA x0.5+ 350 x 3.5 x0.5+ 1000 1000 *2 - 1.325 years 1000 1000 400 350 DL 150 x0+ -x0.4+ x 2.5 = 0.572 years 900 900 900 150 (i) (ii) Explain why the duration of deposits is equal to 0 years in the table above. Provide an example of how: a. The duration of short-term certificates of deposit can be 0.4 years b. The duration of long-term certificates of deposit can be 2.5 years c. The duration of liquid securities can be 0.5 years d. The duration of investments can be 3.5 years e. The duration of fixed rate loans can be 2 years Explain why floating rate loans have a low duration (0.5 years in the example above) even though the maturity of the floating rate loans could be very high (for example a 30-year floating rate home loan). Calculating the duration of a bank's assets and liabilities Duration Oyrs 0.4 yrs 2.5 yrs Assets MV Duration Liabilities MV Liquid Securities 150 0.5 years Deposits 400 Investments 100 3.5 years Short term CDs 350 Floating rate loans 400 0.5 years Long term CDs 150 Fixed rate loans 350 2 years Equity Capital 100 1,000 1,000 100 400 DA x0.5+ 350 x 3.5 x0.5+ 1000 1000 *2 - 1.325 years 1000 1000 400 350 DL 150 x0+ -x0.4+ x 2.5 = 0.572 years 900 900 900 150 (i) (ii) Explain why the duration of deposits is equal to 0 years in the table above. Provide an example of how: a. The duration of short-term certificates of deposit can be 0.4 years b. The duration of long-term certificates of deposit can be 2.5 years c. The duration of liquid securities can be 0.5 years d. The duration of investments can be 3.5 years e. The duration of fixed rate loans can be 2 years Explain why floating rate loans have a low duration (0.5 years in the example above) even though the maturity of the floating rate loans could be very high (for example a 30-year floating rate home loan)