A Bank Has an Average Asset Duration of 5 Years

question 14

Multiple Choice

A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall to 8 percent, what is this bank's change in net worth?

• A) Net worth will decrease by $31.81 million
• B) Net worth will increase by $31.81 million
• C) Net worth will increase by $27.27 million
• D) Net worth will decrease by $27.27 million
• E) Net worth will not change at all

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Definitions:

Time Deposit

A bank deposit with a fixed term or period of maturity, often offering higher interest rates than regular savings accounts.

Maturity

The time at which a financial obligation is due to be paid or a financial instrument, such as a bond, reaches its final installment.

Negotiable Instruments

Negotiable instruments are financial documents that promise payment to the holder and are freely transferable, such as checks, promissory notes, and bills of exchange.

Commercial Paper

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.