CMA Final · Risk Management in Banking and Insurance · Interest Rate Risk Management
A bank's asset portfolio has market value ₹1,000 crore and modified duration 4 years. Liabilities have market value ₹900 crore and modified duration 3 years. If all yields rise by 1 percentage point, the approximate change in the market value of equity is:
Assets lose about ₹40 crore (1,000 × 4 × 1%) and liabilities fall by about ₹27 crore (900 × 3 × 1%). The net effect on equity value is a fall of ₹13 crore, because the asset decline exceeds the liability decline.
- A-₹13 croreCorrect
- B-₹40 crore
- C+₹13 crore
- D-₹67 crore
Explanation
Asset value falls by 1000 × 4 × 1% = ₹40 crore. Liability value falls by 900 × 3 × 1% = ₹27 crore. Equity change = -40 - (-27) = -₹13 crore. Ignoring the liability offset gives -₹40 crore, and the positive sign is wrong because assets have the larger duration-weighted value.
Did you get it right without looking?
One question tells you little. A timed set on Interest Rate Risk Management shows your real accuracy, how long you take and where you lose marks.
More Interest Rate Risk Management questions
- A bank has assets of Rs 5,000 crore with duration 3 years and liabilities of Rs 4,500 crore with duration 2 years. Ignoring convexity and as…
- A bond has a modified duration of 4.5 and is trading at a price of ₹1,000. Using the duration approximation, the price change for a rise in …
- Under the Basel framework for interest rate risk in the banking book (IRRBB), the Economic Value of Equity (EVE) measure focuses on:
- A bank holds a bond with modified duration of 4.5. If the yield rises by 40 basis points, what is the approximate percentage change in the b…
- A bank's one-year time bucket in its repricing gap statement shows rate sensitive assets (RSA) of ₹850 crore and rate sensitive liabilities …
- A bank holds a bond portfolio with a market value of Rs 500 crore and a modified duration of 4.2 years. If yields rise by 50 basis points, w…