1. A bank added a bond to its portfolio. The bond has a duration of 12.3 years and cost $1,109. Just...

Question

1. A bank added a bond to its portfolio. The bond has a duration of 12.3 years and cost $1,109. Just after buying the bond, the bank discovered that market interest rates are expected to rise from 8% to 8.75%. What is the expected change in the bond’s value?
2. Calculate the change in the market value of assets and liabilities when the average duration of assets is 3.60, the average duration of liabilities 0.88, and interest rates increase from 5% to 5.5%.
3. Springer County Bank has assets totaling $180 million with a duration of five years, and liabilities totaling $160 million with a duration of two years. If interest rates drop from 9% by 75 basis points, what is the change in the bank’s capitalization ratio?

David · Accepted Answer

1. A bank added a bond to its retained portfolio. The bond has a duration of 12.3 years and cost $1,109. 
Just after buying the bond, the bank discovered that market interest rates are expected to rise from 
8% to 8.75%. What is the expected change in the bond’s value? 
Solution:
Duration
1
0.0075
12.3 $1,109 $94.73
1 0.08
P i
P i
P
 
  

      

 
Thus,

1. A bank added a bond to its portfolio. The bond has a duration of 12.3 years and cost $1,109. Just after buying the bond, the bank discovered that market interest rates are expected to rise from 8%...

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