Question

In: Finance

The duration gap (DGAP) of the bank is

The duration gap (DGAP) of the bank is

Solutions

Expert Solution

Solution.>

Duration Gap is the difference in the price sensitivity of interest-yielding assets and the price sensitivity of liabilities (of the organization) to a change in market interest rates (yields). The duration gap measures how well matched are the timings of cash inflows (from assets) and cash outflows (from liabilities).

The formua for DGAP is:-

where;

Note: Give it a thumbs up if it helps! Thanks in advance!

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

how a typical bank-with a positive duration gap and a negative gap-entering into a futures contract...
how a typical bank-with a positive duration gap and a negative gap-entering into a futures contract to sell a T-bond a specified price can help offset the negative impact of rising interest rate.
What is the duration GAP of a bank whose assets and liabilities are as follows? Assets:...
What is the duration GAP of a bank whose assets and liabilities are as follows? Assets: Cash $48 million Short-term Investments (D=0.8) $149 million Short-term Loans (D=0.6) $201 million Long-term Investments (D=4.2) $254 million Long-term Loans (D=6.2) $398 million Liabilities: Demand Deposits $46 million Short-term Interest-bearing Deposits (D=0.3) $595 million CDs (D=2.5) $148 million Borrowed funds (D=0.1) $153 million Round to three decimals.
What is the duration GAP of a bank whose assets and liabilities are as follows? Assets:...
What is the duration GAP of a bank whose assets and liabilities are as follows? Assets: Cash $52 million Short-term Investments (D=0.4) $153 million Short-term Loans (D=0.8) $201 million Long-term Investments (D=3.8) $247 million Long-term Loans (D=5.2) $400 million Liabilities: Demand Deposits $46 million Short-term Interest-bearing Deposits (D=0.3) $592 million CDs (D=2.8) $148 million Borrowed funds (D=0.1) $151 million Round to three decimals.
When the duration gap is negative, it means that the duration of assets < duration of...
When the duration gap is negative, it means that the duration of assets < duration of liabilities, so liabilities are more sensitive than assets to interest rate changes. My understanding of this is, that if interest rates fall, you pay less on liabilities, and so income would increase....but then why would equity decrease? Wouldn't equity increase? I'm also confused as to why a negative gap would mean that a rise in interest rates makes equity increase and why a positive...
A bank wants to use direct refinancing to manage its duration gap, DG. Currently, for its...
A bank wants to use direct refinancing to manage its duration gap, DG. Currently, for its assets, loans = $22 million and cash = $6 million. Equity = $4 million. Average DA = 2.75 years, and average DL = 4 years. a) Should the bank buy loans with cash or sell existing loans for cash to reduce its interest risk? b) What is the duration of the bank's existing loans? c) How much cash will be used to eliminate the...
Question 21 What is the Duration Gap for the bank balance sheet shown below? Assets Amount...
Question 21 What is the Duration Gap for the bank balance sheet shown below? Assets Amount Duration Liabilities and Equity Amount Duration Cash 80 0.00 Non-interest deposits 150 0.00 Securities 300 4.00 NOW checking 150 1.50 Loans, net 570 5.00 MMDA 300 0.25 Fed funds sold 0 CDs 170 2.00 Non-earning assets 50 Fed Funds purchased 150 0.00 $1,000 Equity 80 $1,000 A. 3.41 years B. 4.05 years C. 3.35 years D. 5.25 years E. 0.70 years
Question 18 What is the Duration Gap for the bank balance sheet shown below? Assets Amount...
Question 18 What is the Duration Gap for the bank balance sheet shown below? Assets Amount Duration Liabilities and Equity Amount Duration Cash 80 0.00 Non-interest deposits 100 0.00 Securities 270 4.25 NOW checking 170 1.00 Loans, net 600 4.75 MMDA 330 0.25 Fed funds sold 0 CDs 160 1.75 Non-earning assets 50 Fed Funds purchased 150 0.00 $1,000 Equity 90 $1,000 A. 3.9975 years B. 3.465 years C. 6.00 years D. 0.5852 years E. 3.41 years
Compare and contrast income gap and duration gap analysis as techniques for management of interest rate...
Compare and contrast income gap and duration gap analysis as techniques for management of interest rate risk by banks.
Is duration GAP a valid tool to manage the interest rate risk? WHY?
Is duration GAP a valid tool to manage the interest rate risk? WHY?
Consider the following. a. Calculate the leverage-adjusted duration gap of an FI that has assets of...
Consider the following. a. Calculate the leverage-adjusted duration gap of an FI that has assets of $1.7 million invested in 25-year, 10 percent semiannual coupon Treasury bonds selling at par and whose duration has been estimated at 10.01 years. It has liabilities of $970,000 financed through a two-year, 9.00 percent semiannual coupon note selling at par. b. What is the impact on equity values if all interest rates fall 25 basis points—that is, ΔR/(1 + R/2) = –0.0025? (For all...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT