A bank has $50 million in assets, $47 million in liabilities and $3 million in shareholders' equity. If the duration of its liabilities are 1.3 and the bank wants to immunise its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of ________.

Question

Quizplus · Accepted Answer

Duration of assets = (Duration of liabilities * Liabilities - Duration of equity * Equity) / Assets
Duration of assets = (1.3 * 47 - 0 * 3) / 50 = 1.22. Therefore, the bank should select assets with an average duration of 1.22 to immunise its net worth against interest rate risk.

A Bank Has $50 Million in Assets, $47 Million in Liabilities