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

Cash 0.00 $10

Investment Grade Bonds 12.00 $65.00

Commercial Loans 4.00 $400.00

Consumer Loans 8.00 $250.00

Deposits 1.10 $600.00

Nondeposit Borrowings 0.25 $50.00

a) What is the duration gap? b) What size interest rate change would make the institution

insolvent if rates are currently 6%? c) Explain how the bank could change the durations

of assets and liabilities to get E to equal zero to protect the equity value in the event of

an interest rate change?