The duration analysis of the bank which have $100 billion of assets with average duration of 4 years and $90 billion of liabilities with average duration of 6 years and the impact on net worth of the bank if interest rate rise by 2% points. What are the actions required to reduce the bank’s interest-rate risk? Concept Introduction: Duration analysis is the process of analyzing the risk of interests to a bank’s net worth. When interest rates turn volatile or if there is any unannounced or sudden change in the rate of interest, the net worth of a bank will face high risks. Net worth of the bank is derived from the difference between what is claimed by or owed to the bank. The net worth of the bank provides a clear picture of its financial condition. Total liabilities minus total assets of the bank give us its net worth. The interest-rate risk refers to the risk associated with an investment's value that may change due to a fluctuation in the absolute level of interest rates.

Question

Want to see the full answer?

Answer 1

Question

Chapter 9, Problem 24AP

To determine

The duration analysis of the bank which have $100 billion of assets with average duration of 4 years and $90 billion of liabilities with average duration of 6 years and the impact on net worth of the bank if interest rate rise by 2% points. What are the actions required to reduce the bank’s interest-rate risk?

Concept Introduction:

Duration analysis is the process of analyzing the risk of interests to a bank’s net worth. When interest rates turn volatile or if there is any unannounced or sudden change in the rate of interest, the net worth of a bank will face high risks.

Net worth of the bank is derived from the difference between what is claimed by or owed to the bank. The net worth of the bank provides a clear picture of its financial condition. Total liabilities minus total assets of the bank give us its net worth.

The interest-rate risk refers to the risk associated with an investment's value that may change due to a fluctuation in the absolute level of interest rates.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

2. Question The 'Democratic Family' consists of three members {mother m, father f, daughter d}, that have different preferences with respect to how much money X € [0,8] they think should be invested in the new family car. These preferences can be represented by the following utility functions: - Mother m: um(X) = 2X - X² Father f: uf(X) = 10X - X² - Daughter d: ud(X) = 4X - X² Calculate for each family member (f, m, d) the preferred amount of money to invest in the new car denoted by X; for i = {m, f,d}. Assume that (Xf, Xm, Xd) are the three alternatives on which the family must decide. Show that each family member has rational preferences over this domain. Preferences on the family level are determined by pairwise majority voting (all family members vote on two alternatives). Derive the family preference and check whether it is rational. Assume that the final family decision is made by conducting sequential pair- wise majority voting, where the loosing alternative is eliminated. Does…

3. Question You invented a new lateral-flow test for asymptomatic Covid-19 detection, where saliva is entered into a test-tube and then the result is shown directly on the device. However, to save on costly chemicals you designed the tests such that it always reports a negative test result. Assume that the incidence rate is 5 per 1000 and that your test is used for detection of asymptomatic cases (without symptoms). (a) Calculate the probability that 100 randomly determined volunteers receive a correct test result by using the AND-rule and the OR-rule. Can your test be qualified as a diagnostic test? (b) The health authorities are investigating the performance of your test. Government guidelines require a specificity (conditional probability to re- ceive a negative test result given that the test-taker is not infected with COVID19) of at least 97% and a sensitivity (conditional probability to receive a positive test result given that the test-taker is infected with COVID-19) of at…