5. Consider the following bank balance sheet (fixed rates and pure discount securities unless indicated otherwise). Interest rates on liabilities are 4 percent and on assets are 6 percent. Duration Sbillion (years) Assets Prime-Rate Loans (rates set daily) 400 1.0 1-Year Discount Loans 360 1.0 30-Year Mortgages 500 7.0 Total Assets 1260 ? Liabilities and Equity Super Now Checking Accounts (rates set daily) 500 1.0 6-Month Certificates of Deposit 380 .5 3-Year Certificates of Deposit 280 3.0 Total Liabilities 1160 ? Equity (E) 100 a. b. C. d. What is the duration of assets, DA, and liabilities, DL? Given the duration imbalance of assets and liabilities, what is the loss in market value of assets, liabilities and equity as a result of an interest rate rise by 200 bp? Compute and show the repricing gap for the bank using those assets and liabilities repricing, maturing in 2 years or less or with a duration of 2 years or less. From this information will the bank benefit or be hurt by a 150 basis point rise in interest rates on assets and liabilities? Find the duration of assets, assuming the duration of liabilities remains the same, that will fully net worth immunize the bank from interest rate changes? Define net worth immunization and state the advantages and disadvantages of using it and asset/liability duration as a means of measuring and managing interest rate risk. In the above balance sheet, which asset is most responsible for the duration mismatch and the interest rate risk of this portfolio? If the bank were to hedge interest rate risk, what would the duration of this asset have to be set at in order to immunize the portfolio. How might this be done using 10-year T- Bond futures contract or options on this futures contract? What would be the amount ($) of futures contracts that would need to be invested to achieve immunization assuming the duration of the futures contract is the same as the offending asset? Define your terms. (HINT: find the amount of the offending asset needed to be reduced to achieve immunization.) e. f. DA LDL AE = -Ay[- JA *(1+y) A (1+y:) If AE = 0; LD (1+y) D A (1+y) 5. Consider the following bank balance sheet (fixed rates and pure discount securities unless indicated otherwise). Interest rates on liabilities are 4 percent and on assets are 6 percent. Duration Sbillion (years) Assets Prime-Rate Loans (rates set daily) 400 1.0 1-Year Discount Loans 360 1.0 30-Year Mortgages 500 7.0 Total Assets 1260 ? Liabilities and Equity Super Now Checking Accounts (rates set daily) 500 1.0 6-Month Certificates of Deposit 380 .5 3-Year Certificates of Deposit 280 3.0 Total Liabilities 1160 ? Equity (E) 100 a. b. C. d. What is the duration of assets, DA, and liabilities, DL? Given the duration imbalance of assets and liabilities, what is the loss in market value of assets, liabilities and equity as a result of an interest rate rise by 200 bp? Compute and show the repricing gap for the bank using those assets and liabilities repricing, maturing in 2 years or less or with a duration of 2 years or less. From this information will the bank benefit or be hurt by a 150 basis point rise in interest rates on assets and liabilities? Find the duration of assets, assuming the duration of liabilities remains the same, that will fully net worth immunize the bank from interest rate changes? Define net worth immunization and state the advantages and disadvantages of using it and asset/liability duration as a means of measuring and managing interest rate risk. In the above balance sheet, which asset is most responsible for the duration mismatch and the interest rate risk of this portfolio? If the bank were to hedge interest rate risk, what would the duration of this asset have to be set at in order to immunize the portfolio. How might this be done using 10-year T- Bond futures contract or options on this futures contract? What would be the amount ($) of futures contracts that would need to be invested to achieve immunization assuming the duration of the futures contract is the same as the offending asset? Define your terms. (HINT: find the amount of the offending asset needed to be reduced to achieve immunization.) e. f. DA LDL AE = -Ay[- JA *(1+y) A (1+y:) If AE = 0; LD (1+y) D A (1+y)
