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FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

A bank has assets of 1,000 with a modified duration of 4.0 and liabilities of 900 with a modified duration of 4.0. Equity is 100. For a parallel yield increase of 1%, ignoring convexity, what is the approximate change in the market value of equity?

Equity value falls by about 4.0. Assets lose 40 (1,000 × 4.0 × 1%) while liabilities fall by 36 (900 × 4.0 × 1%), so the net loss to equity is 4. Equal durations still leave a gap because assets exceed liabilities in size.

  1. A-4.0Correct
  2. B-40.0
  3. C-3.6
  4. D+4.0

Explanation

Asset change = -1,000 × 4.0 × 0.01 = -40. Liability change = -900 × 4.0 × 0.01 = -36. Equity change = -40 - (-36) = -4.0. The -40 option ignores the liability offset, and -3.6 uses the liabilities-only scaling incorrectly.

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