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Consider a bank with 10M in shareholder equity. It has assets and liabilities according to the following table: Assets Liabilities Rate Sensitive Assets 100M Rate
- Consider a bank with 10M in shareholder equity. It has assets and liabilities according to the following table:
Assets | Liabilities |
Rate Sensitive Assets 100M | Rate Sensitive Liabilities 75M |
Fixed Rate Assets 75M | Fixed Rate Liabilities 100M |
Suppose the average duration of assets is 3 years, and the average duration of liabilities is 4 years.
- If the interest rate changes by 2%, what is the banks new shareholder equity? (hint: use duration analysis to find the change in the banks net worth)
- Does the bank remain solvent?
- What is the change in the banks profits according to gap analysis?
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