Part 1: Bank ABC has the following 2 bond-like loans: Loan 1: $1m loan fixed for 3 years at 10% Loan...

Question

Part 1: Bank ABC has the following 2 bond-like loans: Loan 1: $1m loan fixed for 3 years at 10% Loan 2: $1m loan fixed for 5 years at 12% The market interest rate is now at 5%. What is the duration of the bank's loan portfolio? If the market interest rate increases by 1% now, what will be the percentage change of the present value of the portfolio? Part II: ABC has $1.5m of liabilities (at market value) with a duration of 2.68 years. How much will the value of the bank change due to the change in interest rate.

Komalavalli · Accepted Answer

Total Loan duration is 5 years
	 
	FVat5%
	FVat6%
	 
	Change in percentage of value of portfolio
	Loan1
	-1276282
	-1157625
	-2433907
	 
	Loan 2
	-1338226
	-1191016
	-2529242
	4%
 Percentage change portfolio value is 4% 
Part 2
	Liabilities
	1500000
	Total asset
	2529242
	change in bank value
	1029242
Change in value of bank due to change in interest rate is $1029242
Total
 
Loan duration is 
5
 
years
 
 
 
FVat5%
 
FVat6%
 
 
 
Change in 
percentage 
of value of 
portfolio
 
Loan1
 
-
1276282
 
-
1157625
 
-
2433907
 
 
 
Loan 2
 
-
1338226
 
-
1191016
 
-
2529242
 
4%
 
 
Percentage change 
portfolio value is
 
4
% 
 
Part 2
 
Liabilities
 
1500000
 
Total asset
 
2529242
 
change in bank value
 
1029242
 
 
Change in value of bank due to change in interest rate is $
1029242

Part 1: Bank ABC has the following 2 bond-like loans: Loan 1: $1m loan fixed for 3 years at 10% Loan 2: $1m loan fixed for 5 years at 12% The market interest rate is now at 5%. What is the duration of...

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