A bank has an average asset duration of 5 years and an average liability duration of 9 years.This bank has total assets of $1,000 million and total liabilities of $850 million.Currently,market interest rates are 5 percent.What will be this bank's leverage-adjusted duration gap?
A)-4 years
B)4 years
C)2.65 years
D)-2.65 years
E)3.65 years

Question

Quizplus · Accepted Answer

Leverage-adjusted duration gap = (duration of assets / (1+interest rate)) - (duration of liabilities / (1+interest rate))

= (5 / (1+0.05)) - (9 / (1+0.05))

= 2.65 (rounded to two decimal places)

Since the duration gap is negative, this means the bank's liabilities are more interest rate sensitive than its assets. This puts the bank at risk of losses if interest rates rise.

A Bank Has an Average Asset Duration of 5 Years