A Bank Has an Average Asset Duration of 5 Years

question 56

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 $31.82 million
• B) Net worth will increase by $31.82 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:

Dividends

Portions of a company's earnings paid out to shareholders as a reward for their investment.

FOB Destination

A shipping term indicating that the seller is responsible for goods and shipping costs until the goods reach the buyer's specified location.

Merchandise

Goods bought for the purpose of resale at a profit.

Accounting Equation

The fundamental equation that represents the relationship among assets, liabilities, and equity of a company; Assets = Liabilities + Equity.