Consider the following summarised balance-sheet and associated average interest rates of a bank. The bank holds zero-coupon bonds that have a 4-year maturity with a 7% discount rate. Amounts in the balance-sheet represent current market values.

Give two practical recommendations to this bank in terms of minimizing its interest rate risk exposure without changing the size of its balance-sheet. [on paper it is shown as:

1. Calculate the Macaulays Duration for the banks bonds.

[10 marks]

2. Calculate the duration GAP for the bank and the corresponding change in its equity if interest rates were to fall by 3 percentage points.

[30 marks]

3. Give two practical recommendations to this bank in terms of minimizing its interest rate risk exposure without changing the size of its balance-sheet.]

Amount Rate ? Macaulay's Duration (years) ? Assets Cash Bonds Commercial Loans 100,000 300,000 100,000 7.0% ? 12.0% 7.0 Macaulay's Duration (years) ? Liabilities & Equity 1-year time deposits Large CDs Transaction accounts Equity Amount 50,000 150,000 200,000 100,000 Rate 1.0% 6.0% 2.0% 4.0 2.0