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weighted duration b. The weighted duration of liabilities c. The duration gap a. tion of assets

weighted duration b. The weighted duration of liabilities c. The duration gap a. tion of assets

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Given the above balance sheet, determine the following: a. The weighted duration of assets b. The weighted duration of liabilities c. The duration gap d. Percentage (%) change in value of assets (assume the current interest rate is 10% and increases by 5% to 15%) e. Percentage (%) change in value of liabilities (assume the current interest rate is 10% and increases by 5% to 15%) f. Percentage (%) change in net worth (assume the current interest rate is 10% and increases by 5% to 15%) g. Based on your answers for a. to f. above, how will a 5% increase in interest rates affect the bank's financial standing? h. Traditionally, how can the bank protect itself from rising interest rates? i. How can the bank use Interest Rate Swap (IRS) to hedge the duration gap? (That is, to reduce the duration on the asset side of its balance sheet in order to reduce the positive gap, and/or lengthen the duration on the liability side. j. In Malaysia, banks are required to establish Asset-Liability Committees (ALCO), what is the main task of the committees?
Transcribed Image Text:Given the above balance sheet, determine the following: a. The weighted duration of assets b. The weighted duration of liabilities c. The duration gap d. Percentage (%) change in value of assets (assume the current interest rate is 10% and increases by 5% to 15%) e. Percentage (%) change in value of liabilities (assume the current interest rate is 10% and increases by 5% to 15%) f. Percentage (%) change in net worth (assume the current interest rate is 10% and increases by 5% to 15%) g. Based on your answers for a. to f. above, how will a 5% increase in interest rates affect the bank's financial standing? h. Traditionally, how can the bank protect itself from rising interest rates? i. How can the bank use Interest Rate Swap (IRS) to hedge the duration gap? (That is, to reduce the duration on the asset side of its balance sheet in order to reduce the positive gap, and/or lengthen the duration on the liability side. j. In Malaysia, banks are required to establish Asset-Liability Committees (ALCO), what is the main task of the committees?
Question 2 Assets* Short-term loans Medium-term loans Long-term loans Total assets Liabilities* Current accounts Saving accounts Fixed deposits Total liabilities Simplified Bank Balance Sheet Amount Proportion /Weight (RM'million) 400 200 400 1,000 0.4 0.2 0.4 Amount Proportion (RM'million) /Weight 400 200 400 1,000 0.4 0.2 0.4 * For purpose of simplicity, we ignore the non-operational items of the balance sheets Estimated Average Maturit y 1.5 years 4.0 years 25 years Estimated Average Maturity 0 1.5 years 5 Estimated Duration 1 year 3 year 20 years Estimated Duration 1 year 4 years
Transcribed Image Text:Question 2 Assets* Short-term loans Medium-term loans Long-term loans Total assets Liabilities* Current accounts Saving accounts Fixed deposits Total liabilities Simplified Bank Balance Sheet Amount Proportion /Weight (RM'million) 400 200 400 1,000 0.4 0.2 0.4 Amount Proportion (RM'million) /Weight 400 200 400 1,000 0.4 0.2 0.4 * For purpose of simplicity, we ignore the non-operational items of the balance sheets Estimated Average Maturit y 1.5 years 4.0 years 25 years Estimated Average Maturity 0 1.5 years 5 Estimated Duration 1 year 3 year 20 years Estimated Duration 1 year 4 years
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