Question 5 (6 marks) Table 2 illustrates a hypothetical balance sheet of an imaginary bank. Table 2. Hypothetical balance sheet of an imaginary bank Asset Value Interest Modified Liability Value Interest Modified ($ mil) rate (%) duration and ($ mil) rate (%) duration equity Cash 1,000 0 0 Deposits 9,000 3 0 Loan 10,000 6 4.47 Bonds 3,000 4.5 3.74 T-bills 4,000 5 1 CDs 2,200 4 1.96 Total 14,200 1.094 Equity 800 3.25 Total 15,000 Total 15,000 (a) Calculate the duration of the bank's equity. [1 mark] (b) To immunize the bank's balance sheet from interest risk, the risk manager decides to increase the liability duration by reducing the dependence on deposits and holding more bonds. Show how the risk manager can achieve an immunization from interest risk. Suggested formula: DEquity =DAsset-Liabilities Ass Ass-Liab DAsset Liab Ass Liab DLiabilities Amount to Exchange = Change in Portfolio Duration x Portfolio Value Change in Asset Duration [5 marks]