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MANAGING INTEREST RATE RISK: DURATION GAP AND MARKET VALUE OF EQUITY - page 31 / 39

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Duration Gap for ABC’s MVE

1.

Mkt value of assets = 1,001,963 Duration of assets = 2.6

2.

Mkt value of liabilities = 919,400 Duration of liabilities = 2.0

Dur Gap= 2.6 – (919,400 / 1,001,963) * 2.0

= 0.765 yrs

Example:

A 1% increase in rates would reduce MVE by 7.2 million

= 0.765 (0.01 / 1.0693) 1,001,963

Recall that the average rate on assets is 6.93%

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