Changing interest rates and duration of assets-liabilities

Reference no: EM13827741

Problem:

The following information is about current spot rates for an FI's assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.

Assets	Liabilities
1-year loan rate: 7.50 percent	1-year CD rate: 6.50 percent
2-year loan rate: 8.15 percent	2-year CD rate: 6.65 percent

1. If rates do not change, the balance sheet position that maximizes the FI's returns is

a. a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs.
b. a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans.
c. a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD.
d. a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans.
e. a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans.

2. What is the duration of the two-year loan (per $100 face value) if it is selling at par?

a. 2.00 years.
b. 1.92 years.
c. 1.96 years.
d. 1.00 year.
e. 0.91 years.

3. If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged adjusted duration gap of this position? Use your answer to the previous question.

a. +1.25 years.
b. +1.12 years.
c. -1.12 years.
d. +0.92 years.
e. -1.25 years.

4. Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points.

a. -$1.756.
b. -$1.775.
c. +$98.24.
d. -$1.000.
e. +$1.924.

Summary

These short questions is from Finance and the questions deal with bank's assets as well as liabilities with changing interest rates and duration of assets and liabilities.

Reference no: EM13827741

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