What is the duration of the floating rate mortgages?
Bank of Charub ($ million)
Assets: Liabilities and Net Worth:
270 day US Treasury bills $500m 1 year Certificates of Deposit $550m
2 year consumer loans Demand Deposits $750m
Fixed rate, 12% p.a. annually $275m 2 year Bonds $175m
7 year commercial loans $350m Fixed rate, 7.5% p.a. annually
Fixed rate, 9% p.a. annually Overnight Fed Funds $350m
10 year fixed rate mortgages $675m
Fixed rate, 6.5% p.a. monthly
10 year floating rate mortgages $125m Equity $100m
LIBOR+50bp, monthly roll date
Notes: The 1 year Certificates of Deposit pay 1.95% p.a. annually. The demand deposits
are non-interest bearing and have a duration of zero. The 7 year commercial loans have a
duration of 4.75 years. The fixed rate mortgages have a duration of 8.3 years. All values
are market values.
1. What is the duration of the floating rate mortgages?
a. 0.25 years
b. 10 years
c. 2 years
d. 0.08 years
e. There is not enough information to answer the question
A floating interest rate is an interest rate that moves up and down with the market or an index. It can also be referred to as a variable interest rate because it can vary over the duration of the debt obligation. This contrasts with a fixed interest rate, in which the interest rate of a debt obligation stays constant for the duration of the loan's term.
Residential mortgages can be obtained with either fixed or floating interest rates. With fixed interest rates, the mortgage interest rate is static and cannot change for the duration of the mortgage agreement. With floating or variable interests rates, the mortgage interest rates can change periodically with the market.
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