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Question 6

A bank wants to use direct refinancing to manage its duration gap,

DG. Currently, for its assets, Loans = $22 million and Cash = $6 million. Equity = $4 million. Average DA = 2.75 yrs, and average DL = 4 yrs.

6.1 Should the bank buy loans with cash or sell existing loans for cash to reduce its interest rate risk?

6.2 What is the duration of the bank's existing loans?

6.3 How much cash will be used to eliminate the bank's interest rate exposure, if the loanavailable on the market has a duration of 7.6 years?

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