Use the following table to answer the question :

-Assuming that the average duration of its assets is four years,while the average duration of its liabilities is three years,then a 5 percentage point increase in interest rates will cause the net worth of First National to ________ by ________ of the total original asset value.
A)decline;5 percent
B)decline;10 percent
C)decline;15 percent
D)increase;20 percent

Question

Use the following table to answer the question :

-Assuming that the average duration of its assets is four years,while the average duration of its liabilities is three years,then a 5 percentage point increase in interest rates will cause the net worth of First National to ________ by ________ of the total original asset value.
A)decline;5 percent 
B)decline;10 percent 
C)decline;15 percent 
D)increase;20 percent

Quizplus · Accepted Answer

The net worth of First National will decline because the duration of its assets is longer than the duration of its liabilities. This means that the value of its assets will decrease more than the value of its liabilities when interest rates increase. The difference in duration (4 years - 3 years = 1 year) multiplied by the change in interest rates (5 percentage points) gives a 5 percent decline in the total original asset value.

Use the Following Table to Answer the Question