Answer Happy

A tiny bank's commercial loan portfolio consists of two commercial loans only. The first one requires a single payment of £50 million in four years, with no other payments till then. The second loan requires an annual interest payment of £4 million. The principal of £40 million is due in 3 years. The current interest rate is 8%. d) What is the duration of the bank's commercial loan portfolio? (25 marks) e) What will happen to the value of this loan portfolio if the general level of interest rates increases to 8.5%? (25 marks) f) Assume the bank holds 'reserves and cash items' and 'commercial loans' for assets only, and its L/A ratio is 0.95. The duration of the liability of the bank is 2.35. Suppose interest rate increases from 8% to 8.5%. How would the total net worth of this bank change? (20 marks)