Continental Bank holds assets and liabilities as follows: Assets Amount (million) Duration Liabilities Amount (million) Duration Commercial loans 170 3.7 Deposits 280 0.80 Consumer loans 166 2.9 Certificates of deposit 180 1.60 Mortgage loans 270 9.2 Original interest rate = 3.75% Original interest rate = 1.25% 1.The bank expects interest rates on assets and liabilities to rise to 4.25% and 1.75% respectively. What is the net change in net worth if the bank’s expectation on the interest rate change is correct? Show your calculations.
Continental Bank holds assets and liabilities as follows: Assets Amount (million) Duration Liabilities Amount (million) Duration Commercial loans 170 3.7 Deposits 280 0.80 Consumer loans 166 2.9 Certificates of deposit 180 1.60 Mortgage loans 270 9.2 Original interest rate = 3.75% Original interest rate = 1.25% 1.The bank expects interest rates on assets and liabilities to rise to 4.25% and 1.75% respectively. What is the net change in net worth if the bank’s expectation on the interest rate change is correct? Show your calculations.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Continental Bank holds assets and liabilities as follows:
| Assets |
Amount (million) |
Duration |
Liabilities |
Amount (million) |
Duration |
|
|
Commercial loans |
170 |
3.7 |
Deposits |
280 |
0.80 |
|
|
Consumer loans |
166 |
2.9 |
Certificates of deposit |
180 |
1.60 |
|
|
Mortgage loans |
270 |
9.2 |
||||
| Original interest rate = 3.75% | Original interest rate = 1.25% |
1.The bank expects interest rates on assets and liabilities to rise to 4.25% and 1.75% respectively. What is the net change in net worth if the bank’s expectation on the interest rate change is correct? Show your calculations.
2.The bank would like to be immune from interest rate change, and it would like to maintain the duration of the liabilities. What is the target duration of the assets the bank should try to achieve?
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