Question

Please answer the following questions.

Suppose First National Bank holds $100 million in assets with an average duration of 4 years, and it holds $85 million in liabilities with an average duration of 2 years Further suppose there is a 4-percentage-point increase in interest rates. Calculate the percentage decrease in First National Bank's net worth relative to the total original asset value A 4 percentage point increase in interest rates decreases First National Bank's net worth by places) % o the o al original asset value. Round your response o to dec mal

I put -9.20%, but it says it's wrong.

Answer 1

Net worth = assets - liabilities

Change in net worth = change in assets - change in liabilities

= 100 million x - 4% x 4 - (85 million x - 4% x 2)

= -9.2 million

% decline in net worth as a percentage of assets = 9.2 x 100 / 100 = 9.2%

Try a positive value of 9.2 %.