You are analyzing how interest rates affect the equity value of a bank using a duration analysis. After examining the balance sheet of the bank, you noticed that the value of its total assets and liabilities are $400M and $360M, respectively. You also determined that the duration gap of the bank is equal to 4.0 years. Using a duration analysis, you would like to predict the response of the bank’s equity value (in percentage terms) to a 0.1 percent increase in the market interest rate. You decided to assume that a one percentage point change in the rate is approximately equal to a one percent change in the rate.   Following this approach, determine the percentage response of the bank’s equity to this change in the market interest rate.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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You are analyzing how interest rates affect the equity value of a bank using a duration analysis. After examining the balance sheet of the bank, you noticed that the value of its total assets and liabilities are $400M and $360M, respectively. You also determined that the duration gap of the bank is equal to 4.0 years. Using a duration analysis, you would like to predict the response of the bank’s equity value (in percentage terms) to a 0.1 percent increase in the market interest rate. You decided to assume that a one percentage point change in the rate is approximately equal to a one percent change in the rate.

 

Following this approach, determine the percentage response of the bank’s equity to this change in the market interest rate.

 

Group of answer choices

 

-0.4%

 

-4.0%

 

0.4%

 

-3.6%

 

-0.1%

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