If a bank has a duration gap of 2 years,then a rise in interest rates from 6 percent to 9 percent will lead to

Question

Quizplus · Accepted Answer

A duration gap of 2 years indicates that the bank has more assets (loans and securities) with a maturity of 2 years or longer than liabilities (deposits and borrowed funds) with a maturity of 2 years or longer. When interest rates rise, the value of longer-term assets falls more than the value of shorter-term liabilities, leading to a decline in the market value of net worth. The magnitude of this decline can be estimated using the formula:

Duration Gap x (Change in Interest Rates) / (1 + Current Yield)

Substituting the given values, we have:

2 x (9% - 6%) / (1 + 6%) = -5.66%

Therefore, the correct answer is (C) a fall in the market value of its net worth of 5.66 percent.

If a Bank Has a Duration Gap of 2 Years,then