Estes Park National Bank holds assets and liabilities whose average durations an

Question

Estes Park National Bank holds assets and liabilities whose average durations and dollar amounts are as shown in this table:

What is the weighted average duration of Estes Park’s asset portfolio and liability portfolio? What is the leverage-adjusted duration gap? Suppose market interest rates increase from 3.25 percent to 4.25 percent, by how much would Estes Park’s net worth change? Alternatively, if interest rates decline from 3.25 percent to 2.50 percent, by how much would Estes Park’s net worth change?     

Asset and Liability Items Avg. Duration (years) Dollar Amount (millions) Investment Grade Bonds 15.00 $65.00 Commercial Loans 3.00 $400.00 Consumer Loans 7.00 $250.00 Deposits 1.25 $600.00 Nondeposit Borrowings 0.50 $50.00

Explanation / Answer

Asset and liability items Avg. Duration Amount(Weight) Weighted average Investment grade bonds 15 65 15*65/1365 = 0.71 Commercial loans 3 400 0.88 Consumer loans 7 250 1.28 Deposits 1.25 600 0.55 Non deposit Borrowings 0.50 50 0.02 Total 1365

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