A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall to 8 percent, what is this bank's change in net worth?

Question

Quizplus · Accepted Answer

The bank's net worth increases because assets (longer duration) are more sensitive to interest rate changes than liabilities (shorter duration). When interest rates fall, the value of assets increases more than the value of liabilities, leading to an increase in net worth. The calculation involves the difference in duration times the change in interest rates times the net worth.

A Bank Has an Average Asset Duration of 5 Years