Duration Bank has the following assets and liabilities as of year-end. All asset

Question

Duration Bank has the following assets and liabilities as of year-end. All assets and liabilities are currently priced atp AmountAnnual Amount (S millions) Rate Assets Annual Liabilities (S millions) Rate $40| $60 | 8% 8 % | 3-year CD | 5-year term deposit ! $60 | $301 $10 7% 6% 2-year loans 3-vear loans Equity Total Total $100 $100 What is the effect on the value of the Fi's equity if interest rates decrease by 1 percent? O Gain of $0 697 million. O Gain of $0 338 million. O Loss of $1 622 million. . No change in equity o Loss of S0 605 million

Explanation / Answer

No Change in equity..

Even if interest rate is decrese by 1% there will be no change as all assets and liability are fixed bearing .

Assets Amount Annual Rate Interest Income Liability Liability Annual Rate Interest Expenses 2 year loans 50 8% 4 3 year CD 60 7% 4.2 3 year loans 50 8% 4 5 Year term Deposit 30 6% 1.8 Equity 10 100 8 100 6 Expected Net interest Income - 2

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