23-3 Hedge Row Bank has the following balance sheet (in millions): Assets $220 L

Question

23-3 Hedge Row Bank has the following balance sheet (in millions): Assets $220 Liabilities $198 Equity 22 Total $220 Total $220 The duration of the assets is 8 years and the duration of the liabilities is 6 years. The bank is expecting interest rates to fall from 10 percent to 9 percent over the next year.

If the existing interest rate on the liabilities is 6 percent and that on the assets is 10 percent, what will be the effect on net worth of a 1 percent increase in interest rates? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. (e.g., 32.1616))

Explanation / Answer

Change in the Value of Assets = (0.01/1.1)*(-8)*(220) = -$16

Change in Value of Liabilities = (0.01/1.06)*(-6)*(198) = -$11.2075

Net Worth will change by = -16 - (-11.2075) = - $4.7925

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