2. The balance sheet of Alliance Bank appears as follows: Assets Liabilities and Maturities Short-term securities and Short-term and floating adjustable rate loans $220 rate funds Duration: 6 months Duration: 6 months $560 Fixed rate loans Fixed rate funds Duration: 8 years Nonearning Assets 700- Duration: 30 months 270 80 Equity 170 Total assets $1,000 Total Liabilities and Net Worth $1000 a. Calculate the duration of this balance sheet. [5 Marks] b. Assuming that the required rate of return is 8%, what would be the effect on the bank's economic value if interest rates increased by 1%. [3 Marks] c. Suppose that the expected change in EVE is unacceptable to management. What outcome could management take to reduce this change? [2 Marks] (10 Marks)
2. The balance sheet of Alliance Bank appears as follows: Assets Liabilities and Maturities Short-term securities and Short-term and floating adjustable rate loans $220 rate funds Duration: 6 months Duration: 6 months $560 Fixed rate loans Fixed rate funds Duration: 8 years Nonearning Assets 700- Duration: 30 months 270 80 Equity 170 Total assets $1,000 Total Liabilities and Net Worth $1000 a. Calculate the duration of this balance sheet. [5 Marks] b. Assuming that the required rate of return is 8%, what would be the effect on the bank's economic value if interest rates increased by 1%. [3 Marks] c. Suppose that the expected change in EVE is unacceptable to management. What outcome could management take to reduce this change? [2 Marks] (10 Marks)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![2. The balance sheet of Alliance Bank appears as follows:
Assets
Liabilities and Maturities
Short-term securities and
Short-term and floating
adjustable rate loans
$220
rate funds
Duration: 6 months
Duration: 6 months
$560
Fixed rate loans
Fixed rate funds
Duration: 8 years
Nonearning Assets
700-
Duration: 30 months
270
80
Equity
170
Total assets
$1,000
Total Liabilities and Net Worth
$1000
a. Calculate the duration of this balance sheet. [5 Marks]
b. Assuming that the required rate of return is 8%, what would be the effect on the
bank's economic value if interest rates increased by 1%. [3 Marks]
c. Suppose that the expected change in EVE is unacceptable to management. What
outcome could management take to reduce this change? [2 Marks]
(10 Marks)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F84182846-a3e3-4d47-8c8c-8b7efe2abc5c%2F3ad8b6f4-20f8-496d-9408-a982e24c3c12%2Fdtpw2ae_processed.jpeg&w=3840&q=75)
Transcribed Image Text:2. The balance sheet of Alliance Bank appears as follows:
Assets
Liabilities and Maturities
Short-term securities and
Short-term and floating
adjustable rate loans
$220
rate funds
Duration: 6 months
Duration: 6 months
$560
Fixed rate loans
Fixed rate funds
Duration: 8 years
Nonearning Assets
700-
Duration: 30 months
270
80
Equity
170
Total assets
$1,000
Total Liabilities and Net Worth
$1000
a. Calculate the duration of this balance sheet. [5 Marks]
b. Assuming that the required rate of return is 8%, what would be the effect on the
bank's economic value if interest rates increased by 1%. [3 Marks]
c. Suppose that the expected change in EVE is unacceptable to management. What
outcome could management take to reduce this change? [2 Marks]
(10 Marks)
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