Answer to Question #109163 in Other for zero

Question #109163
Assume that the First National Bank initially has the balance sheet shown above and the interest rates are initially at 10%.

the duration gap is 1.72, what will happen to the bank’s net worth if interest rates rise by 10%?

Will the bank stay in business? Why or why not? Explain your answers and show all the calculations.
Expert's answer

The bank’s net worth will decrease if interest rates rise by 10% because the duration gap is positive.

So, the bank will not stay in business. A positive duration gap is when the duration of assets exceeds the duration of liabilities (which means greater exposure to rising interest rates). If rates go up by 10% the price of assets fall more than the price of liabilities. To find the exact change in net worth, we need to know the date for assets and liabilities.

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