Question

Banque Langenberg reports an average asset duration of 7 years and an average liability duration of 4 years.
In it's latest report the bank recorded total assets of $1.8 billion and total liabilities of $1.5 billion.
Initially the interest rate is 5.0%.
Average asset duration
Average liability duration
Total assets
Total liabilities
Initial interest rate
Interest rate after change
Results
Change in interest rates	0.00%
Change in net worth	0
What is the impact on net worth if the interest rate….
a. Rises to 6.0%
b. Falls to 4.5%

Answer 1

Part-1 if interest rate Rises to 6.0%

Change in Value of Net worth =

DA=Duration of asset

DL= Duration of liability

r= rate of interest

A= Asset value

L= Liability value

=change in interest rate.

Change in Value of Net worth =

=> Change in value of net worth = -0.06285714 or -$0.063 Billion.

Average asset duration	7 yr
Average liability duration	4 yr
Total assets	1.8 Billion $
Total liabilities	1.5 Billion $
Initial interest rate	0.05 or 5%
Interest rate after change	0.06 or 6%
Results
Change in interest rates	0.01 or 1%
Change in net worth	-0.063 Billion $

------------------------------------------------------------

Part-2 if interest rate falls to 4.5%

Change in Value of Net worth =

=>Change in Value of Net worth =

=>Change in Value of Net worth= 0.03142857 or +$0.031 Billion.

Average asset duration	7 yr
Average liability duration	4 yr
Total assets	1.8 Billion $
Total liabilities	1.5 Billion $
Initial interest rate	0.05 or 5%
Interest rate after change	0.045 or 4.5%
Results
Change in interest rates	-0.005 or -0.5%
Change in net worth	+$0.031 Billion