FIN 400 - Management of Financial Institutions 1. DCB bank has an assets size $1,200 million, with duration DA = 2.5 years, DL =0.80 years. In addition, the total liability is $1,104 million. According to the duration gap model, what size interest rate change would make the institution insolvent if rates are currently 5%? 2. The average durations and dollar amounts of assets and liabilities held in Freedom Bank are shown below: Asset and Liability Items Avg Duration(yrs) $ Amount 12.00 $65.00 Investment Grade Bonds Commercial Loans 4.00 $400.00 Consumer Loans 8.00 $250.00 Deposits 1.10 $600.00 Non-deposit Borrowings 0.25 $50.00 What is the weighted average duration of Freedom Bank's asset portfolio? What is the weighted average duration of Freedom Bank's liability portfolio? What is the leverage-adjusted duration gap? 3. Formosa Independence Bank has DA =2.45 years and DL = 1.08 years. In addition, this bank has total assets of $375 million and liabilities of $337.5 million. The CFO of Formosa Independence Bank wishes to effectively reduce the duration gap to one year by hedging with T-Bond futures that have a market value of $115,000 and a DFut = 8 years. How many contracts are needed, and should the bank buy or sell them? (D = duration.) 4. You invest $1,000,000 in Formosa Growth Fund. The Fund charges a front-end load of 5.75% and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's gross rate of return will be 11% per year. What will your investment portfolio be worth in one year? FIN 400 - Management of Financial Institutions 1. DCB bank has an assets size $1,200 million, with duration DA = 2.5 years, DL =0.80 years. In addition, the total liability is $1,104 million. According to the duration gap model, what size interest rate change would make the institution insolvent if rates are currently 5%? 2. The average durations and dollar amounts of assets and liabilities held in Freedom Bank are shown below: Asset and Liability Items Avg Duration(yrs) $ Amount 12.00 $65.00 Investment Grade Bonds Commercial Loans 4.00 $400.00 Consumer Loans 8.00 $250.00 Deposits 1.10 $600.00 Non-deposit Borrowings 0.25 $50.00 What is the weighted average duration of Freedom Bank's asset portfolio? What is the weighted average duration of Freedom Bank's liability portfolio? What is the leverage-adjusted duration gap? 3. Formosa Independence Bank has DA =2.45 years and DL = 1.08 years. In addition, this bank has total assets of $375 million and liabilities of $337.5 million. The CFO of Formosa Independence Bank wishes to effectively reduce the duration gap to one year by hedging with T-Bond futures that have a market value of $115,000 and a DFut = 8 years. How many contracts are needed, and should the bank buy or sell them? (D = duration.) 4. You invest $1,000,000 in Formosa Growth Fund. The Fund charges a front-end load of 5.75% and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's gross rate of return will be 11% per year. What will your investment portfolio be worth in one year
