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:

Random Variable

A numerical outcome-based variable originating from a random phenomenon.

Defective Light Bulbs

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Random Variable

A variable defined by the numerical outcomes possible from random occurrences.

Random Variable

A variable whose values are outcomes of a random phenomenon, typically quantifying aspects of occurrences that are subject to random variations.