Explanation:
The change in the bank's net worth can be estimated using the duration gap model:
ΔNet Worth ≈ - (Duration of Assets × Total Assets - Duration of Liabilities × Total Liabilities) × ΔYield
ΔNet Worth ≈ - (5.0 × $240.0 million - 3.0 × $170.0 million) × 2.0%
ΔNet Worth ≈ - (1,200 - 510) × 0.02
ΔNet Worth ≈ - 690 × 0.02 = -$13.80 million.
Thus, the net worth will decrease by $13.80 million.
Ultimate access to all questions.
$240.0 million with an average asset duration of 5.0 years. It’s liabilities amount to $170.0 million with an average liability duration of 3.0 years. If yields (aka, interest rates) increase by 2.0%, which is nearest to the estimated change in the bank’s net worth?A
Decrease by $13.80 million
B
Decrease by $650,000
C
Increase by $333,000
D
Increase by $5.9 million
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