If interest rates increase from 9 percent to 10 percent,a bank with a duration gap of 2 years would experience a decrease in its net worth of

Question

Quizplus · Accepted Answer

The change in net worth due to a change in interest rates can be approximated by the duration gap formula: ΔNW/NW = -DG × Δy, where ΔNW/NW is the percentage change in net worth, DG is the duration gap, and Δy is the change in yield (interest rates). Here, with a 1 percentage point increase in interest rates (from 9% to 10%) and a duration gap of 2 years, the decrease in net worth would be approximately 2 × 1% = 2% of its assets. However, since the options provided are either 0.9% or 1.8%, the closest and correct choice is 1.8% of its assets.

If Interest Rates Increase from 9 Percent to 10 Percent,a