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A bank has DA = 2.5 years, DL= 0.80 years, and k = 92%. Assets are...

  1. A bank has DA = 2.5 years, DL= 0.80 years, and k = 92%. Assets are equal to $1,200 million. According to the duration gap model, find the change in the direction and magnitude of interest rate that would make the institution insolvent if rates are currently 5 percent?

please answer in excel format

Solutions

Expert Solution

Ans Assets $1200
K 92%
DA 2.5
DL 0.8
R 5%
In order to find the change in direction and magnitude of interest rate, we solve the following equation:
= - (1-K) * Assets = - [DA - (K*DL) * Assets * Change in interest/(1+interest rate)
= - (1-0.92) * 1200 = -[2.5 - (0.92*0.80)*1200*Change in interest/ (1.05)
Solving for change in interest we get,
LHS -96
RHS = -[2.5 - (0.92*0.80)*1200*Change in interest/ (1.05)
Equating LHS = RHS
-96 = - [ 2.5 - (883.20 * change in interest / 1.05)]
96 =2.50 - [883.20 *change in interest/1.05]
Change in interest = 0.0476 or 476 basis points
Assets $1200
K 0.92
DA 2.5
DL 0.8
R 0.05
In order to find the change in direction and magnitude of interest rate, we solve the following equation:
= - (1-K) * Assets = - [DA - (K*DL) * Assets * Change in interest/(1+interest rate)
= - (1-0.92) * 1200 = -[2.5 - (0.92*0.80)*1200*Change in interest/ (1.05)
Solving for change in interest we get,
LHS =- (1-0.92) * 1200
RHS = -[2.5 - (0.92*0.80)*1200*Change in interest/ (1.05)
Equating LHS = RHS
-96 = - [ 2.5 - (883.20 * change in interest / 1.05)]
96 =2.50 - [883.20 *change in interest/1.05]
Change in interest = 0.0476 or 476 basis points


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