Modified duration Question 5(6 marks) Table 2 illustrates a hypothetical balance sheet of an imaginary bank. Table 2. Hy

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Modified Duration Question 5 6 Marks Table 2 Illustrates A Hypothetical Balance Sheet Of An Imaginary Bank Table 2 Hy 1 (101.01 KiB) Viewed 59 times

Modified duration Question 5(6 marks) Table 2 illustrates a hypothetical balance sheet of an imaginary bank. Table 2. Hypothetical balance sheet of an imaginary bank Asset Value Interest Modified Liability Value Interest ($ mil) rate (%) duration and ($ mil) rate (%) equity Cash 1,000 0 0 Deposits 9,000 3 Loan 10,000 6 4.47 Bonds 3,000 T-bills 4,000 5 1 CDs 2,200 4 Total 14,200 Equity 800 Total 15,000 3.25 Total 15,000 4.5 0 3.74 1.96 1.094 (a) Calculate the duration of the bank's equity. [1 mark] (b) To immunize the bank's balance sheet from interest risk, the risk manager decides to increase the liability duration by reducing the dependence on deposits and holding more bonds. Show how the risk manager can achieve an immunization from interest risk. [5 marks) Suggested formula: Liab Dequity = Dasset-Liabilities Ass - Liab Ass Dasset Ass - Liab Pliabilities Amount to Exchange Change in Portfolio Duration x Portfolio Value Change in Asset Duration