Interest rate risk by using the duration approach

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Reference no: EM131551141

Chelsea Bank (CB) is interested in assessing its interest rate risk by using the duration approach. Assume that CB has the following assets: consumer loans ($500; 2.84), commercial loans ($950; 4.33), and long-term corporate bonds ($550; 7.65). CB also has the following liabilities: demand deposits ($250; 0.32), NOW accounts ($450; 0.49), CDs ($600; 0.55), and federal funds purchased ($200; 0.28). All dollar amounts in parentheses are in thousands; the second number is the average duration in years for that particular item. 1. Determine the weighted average duration of CB’s assets. Check figure: DURAS = 4.87 years. 2. Determine the weighted average duration of CB’s liabilities. 3. Estimate CB’s duration gap. Note: Use the equation on p.529. 4. Given duration gap determined above, if CB expects interest rates to increase, should it consider hedging its interest rate risk? Why or why not?

Reference no: EM131551141

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