Accounting Consider a bank with 10M in shareholder equity. It has assets and liabilities according to the following table: Assets Rate Sensitive Assets 100M Fixed Rate Assets 75M Liabilities Rate Sensitive Liabilities 75M Fixed Rate Liabilities 100M Suppose the average duration of assets is 3 years, and the average duration of liabilities is 4 years. a. If the interest rate changes by 2%, what is the bank's new shareholder equity? (hint: use duration analysis to find the change in the bank's net worth) . Does the bank remain solvent? c. What is the change in the bank's profits according to gap analysis?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Accounting
Consider a bank with 10M in shareholder equity. It
has assets and liabilities according to the following
table:
Assets
Liabilities
Rate Sensitive
Rate Sensitive
Assets 100M
Liabilities 75M
Fixed Rate Assets
Fixed Rate
75M
Liabilities 100M
Suppose the average duration of assets is 3
years, and the average duration of liabilities is 4
years.
a. If the interest rate changes by 2%, what is the
bank's new shareholder equity? (hint: use duration
analysis to find the change in the bank's net worth)
b. Does the bank remain solvent?
c. What is the change in the bank's profits according
to gap analysis?
Transcribed Image Text:Accounting Consider a bank with 10M in shareholder equity. It has assets and liabilities according to the following table: Assets Liabilities Rate Sensitive Rate Sensitive Assets 100M Liabilities 75M Fixed Rate Assets Fixed Rate 75M Liabilities 100M Suppose the average duration of assets is 3 years, and the average duration of liabilities is 4 years. a. If the interest rate changes by 2%, what is the bank's new shareholder equity? (hint: use duration analysis to find the change in the bank's net worth) b. Does the bank remain solvent? c. What is the change in the bank's profits according to gap analysis?
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