Suppose that the weighted average duration of a bank's $20 billion portfolio of financial assets was 6, while the duration of its $18.5 billion portfolio of liabilities was 1.
If interest rates at all maturities rose by 25 basis points following a 25 basis point increase by the Fed in its target federal funds rate, what would be the change in the bank's net worth assuming it valued all assets and liabilities at their current market values?
2006-12-18 03:24:53 · 1 answers · asked by Mike S 1 in Business & Finance ➔ Other - Business & Finance
I will give you the formula that you need -- but you have to do the work yourself.
The formula is:
(Change in PV) = -(Duration)*(PV)*(Change in yield)
For the assets, that would be:
Change in value = -6*(20B)*(0.0025)
----------------------------------------
BTW -- in the real world, the shift will not be parallel. Also, the market usually goes up before the announcement.
2006-12-18 03:46:00 · answer #1 · answered by Ranto 7 · 1⤊ 0⤋