FIN3703A

Financial Markets
02: Financial Institutions II: Banks

Dr. YUE Ling

1 Sem1 AY2022/23
 Interest Rate Risk

Part I: ($ thousand)

t CF loan1 CF loan2 CF = 1+2 PV t*PV

1 100 120 220 209.52 209.52
2 100 120 220 199.55 399.09
3 1100 120 1220 1053.88 3161.65
4 120 120 98.72 394.90
5 1120 1120 877.55 4387.75
Total 2439.23 8552.91

MVAssets
• Duration of loan portfolio ≈ 3.51 years
• Percentage Change = 𝑀𝑜𝑑𝐷 ∗ Δ𝑖 ∗ Δ𝑖
= - 3.51/(1.05)*0.01 = -3.34%

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 Interest Rate Risk

• Part I: (alternative method for portfolio duration)

• Duration of loan 1 = 3127.308k / 1136.162k = 2.753

• Duration of loan 2 = 5425.598k / 1303.063k = 4.163
𝑂𝑣𝑒𝑟𝑎𝑙𝑙 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
1136.162𝑘 1303.063𝑘
∗ 2.753 ∗ 4.163
1136.162𝑘 1303.063𝑘 1136.162𝑘 1303.063𝑘
3.51 𝑦𝑒𝑎𝑟𝑠

• The duration of a portfolio equals to the present-value weighted

average duration of each loan in the portfolio.

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 Interest Rate Risk

Part II:
• Firstly, we can calculate the duration gap:
𝑀𝑉
𝐷 𝐷 ∗𝐷
𝑀𝑉
1.5𝑚
𝐷 3.51 ∗ 2.68 1.86
2.44𝑚

• Then, the change of bank value is:

Δ𝑖
Δ𝑀𝑉 𝐷 ∗ ∗ 𝑀𝑉
1 𝑖
0.01
Δ𝑀𝑉 1.86 ∗ ∗ $2.44m $0.043m
1 0.05

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