The market value balance sheet of “DotCom Bank” shows that it has: $ 10 million deposits...

The market value balance sheet of “DotCom Bank” shows that it has: $ 10 million deposits in checking account deposits with a duration of 2 months $ 5 million in cash with zero duration $ 25 million in short - term time deposit accounts with a duration of 1 year $ 50 million in medium term time deposit accounts with a duration of 2.5 years $ 5 million in accounts - receiv ables backed loans with a duration of 1.5 years $ 1 million in interbank overnight loans with zero duration. $ 99 million in mortgages with a duration of 8 years. What should be the duration of assets for the bank’s balance sheet to be immunized against the interest rate risk?

Expert Solution

For the bank to be immunized against the interest rate risk, the duration gap should be zero.

Therefore, the duration of assets should match the duration of the liabilities on the bank's balance sheet.

duration gap = DA– DL*k
k = Total Liabilities/Total Assets

DA = DL x k

jeff jeffy answered 2 years ago

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