Table 23.1
First National Bank

-Refer to Table 23.1.Assuming that the average duration of its assets is five years,while the average duration of its liabilities is three years,a rise in interest rates from 5% to 10% will cause the net worth of First National to ________ by ________ of the total original asset value.

Question

Table 23.1
First National Bank
 
-Refer to Table 23.1.Assuming that the average duration of its assets is five years,while the average duration of its liabilities is three years,a rise in interest rates from 5% to 10% will cause the net worth of First National to ________ by ________ of the total original asset value.

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. When interest rates rise, the value of longer-duration assets falls more than the value of shorter-duration liabilities. The difference in duration (5 years - 3 years = 2 years) and the change in interest rates (from 5% to 10%, a 5% increase) contribute to this decline. The specific percentage decline requires a calculation based on the duration gap and the change in rates, but given the options, a decline of 11% is the correct choice among the provided options.

Table 23.1 First National Bank