Question

Suppose First National Bank holds ​$100 million in assets with an average duration of 3 ​years, and it holds ​$90 million in liabilities with an average duration of 3 years. Further suppose there is a 4​-percentage-point increase in interest rates. Calculate the percentage decrease in First National​ Bank's net worth relative to the total original asset value.

Answer 1

Answer:

% change decrease is = 1.2 %

Explanation:

given data

assets = $100 million

average duration = 3 ​years

liabilities = $90 million

average duration = 3 years

interest rates= 4% increase

to find out

percentage decrease in First National​ Bank's net worth relative to the total original asset value

solution

change in assets value is

change in assets value = $100 million  × 4%  × 3 year = $1200 million

change in liability value is

change in assets value = $90 million  × 4%  × 3 year = $1080 million

change in net worth = $1200 - $1080 = $120 million

so % change is = $\frac{120}{100}$

% change decrease is = 1.2 %