Question
Is there interest rate risk? Use duration gap analysis to determine if there is interest rate risk in the following transaction: A bank obtains $25,000
Is there interest rate risk?
Use duration gap analysis to determine if there is interest rate risk in the following transaction: A bank obtains $25,000 in funds from a customer who makes a deposit with a 5-year maturity that pays 5% annual interest compounded daily. All interest and principal are paid at the end of 5 years. Simultaneously, the bank makes a $25,000 loan to an individual to buy a car. The loan is at a fixed rate of 12% annual interest but is fully amortized with 60 monthly payments, such that the borrower pays the same dollar amount (principal plus interest) each month.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started