A bank has D_A = 2.4 years and D_L= 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Interest rates are at 6 percent. If interest rates increase 100 basis points the predicted dollar change in equity value will equal

Question

Quizplus · Accepted Answer

Using the duration formula we can calculate the percentage change in the value of equity due to a change in interest rates: % change in equity = -D_A * (change in interest rate) * (value of assets) / (1 + D_L * (current interest rate)) % change in equity = -2.4 * 0.01 * 850 / (1 + 0.009 * 0.06) = -0.042 The dollar change in equity is: Dollar change in equity = % change in equity * value of equity = -0.042 * 82 = -$3.44 million Therefore, if interest rates increase by 100 basis points (1%), the predicted dollar change in equity value will be -$12.72 million (since the change in interest rate is doubled). Thus, the correct choice is D.

A Bank Has DA = 2

A Bank Has D_A = 2