Question

In: Finance

X Bank holds Assets and Liabilities whose average durations and dollar amounts are as shown in...

X Bank holds Assets and Liabilities whose average durations and dollar amounts are as shown in the following table:

Asset and Liability Items   Avg. duration in years   Dollar amount in millions
Investment Grade Bonds   10   $50
Non-deposit Borrowings   0.10   20
Consumer Loans   7   250
Commercial Loans   4   400
Deposits   1.10   600
Subordinated Notes   2.80   80
Treasury Bonds   8.25   120


a.   Calculate the weighted-adjusted duration of X’s assets portfolio and liability portfolio. (8 points)
b.   What is the leverage-adjusted duration gap? (5 points)
c.   If the ALM team speculatively take this position, what do you think their expectations are regarding the future market rates? (7 points)
d.   What happens to the net worth of the bank if the interest rates increase from 6% to 7%? (5 points)

Solutions

Expert Solution

Asset and Liability Items   Avg. duration in years   Dollar amount in millions
Assets: Duration yrs Amt
Investment Grade Bonds   10 50 0.0610 0.610
Treasury Bonds    8.25 120 0.1463 1.207
Consumer Loans    7 250 0.3049 2.134
Commercial Loans    4 400 0.4878 1.951
Weighted adjusted duration 820 1 5.902
Liabilities
Deposits    1.1 600 0.8571 0.943
Subordinated Notes    2.8 80 0.1143 0.320
Non-deposit Borrowings    0.1 20 0.0286 0.003
Weighted adjusted duration 700 1 1.266

The definition of LADG is:

LADG = DurAssets – L/A DurLiabilities

Where: DurAssets: (effective) duration of assets

DurLiabilities: (effective) duration of liabilities

L: market value of liabilities

A: market value of assets

Expected that futures market will shoot up

jeff jeffy answered 1 year ago
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