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ZED Bank Plc targets the market value of shareholders equity to manage its interest rate risk. The table below provides information on its assets and
ZED Bank Plc targets the market value of shareholders equity to manage its interest rate risk. The table below provides information on its assets and liabilities for the period ended December :
Assets Amount Rate Duration
Cash
Bonds Years
Commercial loans Years
Total
Liabilities & Equity
Small time deposits Years
Large CDs Years
Transactions account Years
Equity
Total
Required:
A Use the information in the table to calculate the banks duration gap. Is this bank positioned to gain or lose if interest rates rise?
B Estimate the change in market value of equity if all market interest rates fall by an average of percent.
C Provide a specific transaction that the bank could implement to immunize its interest rate risk. The transaction may be a new asset funded by a new liability or an asset sale and the simultaneous purchase of another asset.
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