Use the following information to answer the next questions: (Show your work)
The numbers provided are in millions of dollars and reflect market values:
Cash 40 Deposits historical avg. maturity = 4 years; historical average duration = 3.5 years 100
T-Bills 30 days (4.5 percent, par) 30 Certificates of Deposit avg. maturity = 6 months; avg. duration = 6 months 150
T-Bills 91 days (5.0 percent, par) 60 Short-term Debt avg. maturity = 4 years 250
Commercial Loans avg. maturity = 9.0 years; avg. duration = 7.5 years 200 Long-term debt avg. maturity = 15 years; average duration = 12 years 100
Consumer Loans avg. maturity = 6.0 years; avg. duration = 4.0 years 300 Equity 230
Mortgage Loans – Fixed rate avg. maturity = 30 years; avg. duration = 25 years 150
Mortgage Loans – Adjustable avg. maturity = 30 years; interest rate reset = 6 months 20
Total Assets: 830 Total Liabilities & Equity: 830
1. The short-term debt consists of 4-year bonds paying an annual coupon of 4 percent and selling at par. What is the duration of the short-term debt?
2. What is the weighted average duration of the assets of the FI?
3. What is the weighted average duration of the liabilities of the FI?
4. What is the leverage adjusted duration gap of the FI?
5. A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by
6. What is the effect of a 200 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 5 percent.