Suppose First National Bank holds $100 million in assets with an average duratio

Question

Suppose First National Bank holds $100 million in assets with an average duration of 4 years, and it holds $85 million in liabilities with an average duration of 3 years. Further suppose there is a 2-percentage-point increase in interest rates. Calculate the percentage decrease in First National Bank's net worth relative to the total original asset value

A 2-percentage-point increase in interest rates decreases First National Bank's net worth by ----- % of the total original asset value. (Round your response to two decimal places.)

Explanation / Answer

The change in net worth is the change in the value of assets minus the change in liabilities.

Change in asset value = ($100 million × (-2%) × 4 years)

Change in liability value = ($85 million × (-2%) × 3 years)

Change in net worth = (-8) - (-5.1)

To show this as a percentage of the original asset value, computethe following:

Percentage change = (change in net worth / original asset value) * 100

Percentage change = - 2.90%.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.