Suppose a bank with $500 million in assets has average asset duration of 4.5 yea

Question

Suppose a bank with $500 million in assets has average asset duration of 4.5 years, and an average liability duration of 7 years. The bank also has a total debt ratio of 90%. R may be thought of as the required return on equity or perhaps as the average interest rate level. If R is 12% and the bank is expecting a 150 basis point increase in interest rates, by how much will the equity value change?

-$12,053,571.43

-10,050,217.86

$12,053,571.43

None of the above.

-$12,053,571.43

-10,050,217.86

$12,053,571.43

None of the above.

Explanation / Answer

-$12,053,571.43

150 basis point means R will be incresed by 2.5%

new R=12.5%

12.5% of $500

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