Determine the weighted average duration of cb assets


Problem:

Chelsea Bank (CB) is interested in assessing its interest rate risk by using the duration approach. Assume that CB has the following assets: consumer loans ($500; 2.84), commercial loans ($950; 4.33), long-term corporate bonds ($550; 7.65). CB also has the following liabilities: demand deposits ($250; 0.32), NOW accounts ($450; 0.49), CDs ($600; 0.55), and federal funds ($200; 0.28). All dollar amounts in parentheses are in thousands; the second number is the average duration in years for that particular item.

Required:

Question 1: Determine the weighted average duration of CB's assets. Check figure: DURAS = 4.87 years.

Question 2: Determine the weighted average duration of CB's liabilities.

Question 3: Estimate CB's duration gap.

Question 4: Given duration gap determined above, if CB expects interest rates to decrease, should it consider hedging its interest rate risk? Why or why not?

Note: Show step by step solution and I also want complete calulation.

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Accounting Basics: Determine the weighted average duration of cb assets
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