Duration is a measure of price sensitivity to changes in interest rates, where the greater the duration of the asset (or liability), the more price sensitive that asset (or liability) is. A positive Duration GAP (DGAP) suggests the duration of assets is greater than the duration of liabilities (DA DL) Is the following statement True or False? When DGAP is positive, the economic value of equity (EVE) decreases as rates increase because the decrease in the value of the assets is proportionally more than the decrease in the value of the liabilities, causing the value of equity to fall. True False Consider the following economic value of equity sensitivity analysis. According to the ALCO guidance at both banks "for a +2% or -2% rate shock, EVE should not fall by more than $8.5 million" Which bank will see a decline in EVE by more than the ALCO guideline? (4) (1) (2) (3) (5) Community Financial Bank Percentage Change in EVE Third Midwest Bank Estimated EVE Estimated EVE Interest Rate Percentage Change in EVE Environment $71,340,000 $90,525,000 +3% -10.8% 13.2% +2% $77,430,000 $91,800,000 -3.2% 14.8% $82,650,000 $90,100,000 +1% 3.3% 12.6% $87,000,000 $85,000,000 Base Case -1% $90,480,000 $81,600,000 2.0% 13.1% $97,440,000 $75,650,000 2% 21.8% -5.4% $102,660,000 $71,400,000 -3% 28.3% -10.8% Third Midwest Bank Community Financial Bank Both Third Midwest Bank and Community Financial Bank Neither bank will violate the ALCO guideline What are the weaknesses of DGAP and EVE-Sensitivity analysis? A bank must continuously monitor and adjust the duration of its portfolio. It is difficult to compute duration accurately. It is difficult to estimate the duration of assets and liabilities that earn or pay interest All of the above. Both a and b. Duration is a measure of price sensitivity to changes in interest rates, where the greater the duration of the asset (or liability), the more price sensitive that asset (or liability) is. A positive Duration GAP (DGAP) suggests the duration of assets is greater than the duration of liabilities (DA DL) Is the following statement True or False? When DGAP is positive, the economic value of equity (EVE) decreases as rates increase because the decrease in the value of the assets is proportionally more than the decrease in the value of the liabilities, causing the value of equity to fall. True False Consider the following economic value of equity sensitivity analysis. According to the ALCO guidance at both banks "for a +2% or -2% rate shock, EVE should not fall by more than $8.5 million" Which bank will see a decline in EVE by more than the ALCO guideline? (4) (1) (2) (3) (5) Community Financial Bank Percentage Change in EVE Third Midwest Bank Estimated EVE Estimated EVE Interest Rate Percentage Change in EVE Environment $71,340,000 $90,525,000 +3% -10.8% 13.2% +2% $77,430,000 $91,800,000 -3.2% 14.8% $82,650,000 $90,100,000 +1% 3.3% 12.6% $87,000,000 $85,000,000 Base Case -1% $90,480,000 $81,600,000 2.0% 13.1% $97,440,000 $75,650,000 2% 21.8% -5.4% $102,660,000 $71,400,000 -3% 28.3% -10.8% Third Midwest Bank Community Financial Bank Both Third Midwest Bank and Community Financial Bank Neither bank will violate the ALCO guideline What are the weaknesses of DGAP and EVE-Sensitivity analysis? A bank must continuously monitor and adjust the duration of its portfolio. It is difficult to compute duration accurately. It is difficult to estimate the duration of assets and liabilities that earn or pay interest All of the above. Both a and b
