Question
The following balance sheet information is available for a U.S. financial institution: Assets Liabilities & Equity Item Amount ($) Item Amount ($) Cash 90 Deposits
The following balance sheet information is available for a U.S. financial institution:
Assets |
|
| Liabilities & Equity |
| |
Item | Amount ($) |
|
| Item | Amount ($) |
|
|
|
|
|
|
Cash | 90 |
|
| Deposits | 2,130 |
T-bills | 120 |
|
| Federal funds | 260 |
T-notes | 80 |
|
| CDs | 120 |
T-bonds | 190 |
|
| Equity | 770 |
Loans | 2,800 |
|
|
|
|
|
|
|
| Total (L) | 2,510 |
Total (A) | 3,280 |
|
| Total (L+E) | 3,280 |
a) If the combined weighted duration of T-bills, T-notes and Loans is 8 years, and the duration of the T bond portfolio is 11.2 years, what is the weighted average duration of all the assets? (1 mark)
b) If the weighted average duration of all liabilities is 1.2137 years, what is the FIs duration gap? (0.5 marks)
c) If the current market interest rate is 7% and rates rise to 8%, by how much will equity change (in dollars) and what will the new level of equity be? (0.5 marks)
d) Given your answer to part c), and using an appropriate ratio, comment on the insolvency risk of the institution and a defensive action it could take. (1 mark)
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