MPB Program

(January to June’2026)

Risk Management for Changing Interest Rates

(Reading Materials)
[Theory+Math]

Course Code : MPB-503

Course Name : Risk Management in Banks

Engr. Md. Anisur Rahman

Assistant General Manager
Bangladesh Development Bank PLC.
(MPB 14th Batch, ID # 52514008)
MPB-503 : Risk Management in Banks Risk Management for Interst Rates

1 What is interest rate? Distinguish between nominal and real interest rate. Explain
different types of interest rates used in banking.
 Interest Rate
Interest rate is the price of money or price of creidt, expressed as a
percentage, which a lender charges a borrower for using funds.
In simplest terms the interest rate is a ratio of the fees we must pay to obtain
credit divided by the amount of credit obtained.
 Nominal and Real Interest Rate
 Nominal interest rate : The stated rate without adjusting for inflation.
 Real interest rate : The actual rate of return after adjusting for inflation.
The relationship is : Nominal Interest Rate = Real Interest Rate + Inflation
 Diffent Types of Interest Rates
Different interest rates in banking include:
 Call money rate : Rate at which commercial banks borrow from each other
for short-term needs.
 Policy rate (Repo rate) : Rate at which central bank lends to commercial
banks against securities.
 Reverse repo rate : Rate at which central bank borrows from commercial
banks.
 Bank rate : In Bangladesh, used mainly for refinancing schemes (different
from policy rate).
 Prime rate : Preferential low rate offered to highly creditworthy customers.
 Commitment fee : Charge on unused portion of a sanctioned loan.

2 What forces cause interest rates to change? Describe the two-way effect of interest
rate risk on the value of a firm. [Final Exam-2024]
 Cuases of Interest Rates Change
Interest rates are not set by individual banks. They are determined by the
overall borrowing and lending activities of many people and institutions in
the money and capital markets.
They also change because of how people perceive different types of risk,
such as:
 risk of borrowers not repaying (default risk)
 liquidity risk
 inflation risk
 price and reinvestment risk
 maturity (term) risk
 marketability and call risk

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 Two-Way Effect of Interest Rate Risk

Changes in interest rates create two major forms of risk that affect a firm's value:
1. Price Risk
This risk arises when market interest rates increase. When interest rates
go up, the value of existing bonds and fixed-rate loans declines. If a
financial institution is forced to sell these assets before they mature, it
may incur losses. As a result, the overall value of the institution’s assets
decreases, which ultimately reduces its net worth.
2. Reinvestment Risk
This risk occurs when market interest rates fall. When rates decline, a
financial institution must reinvest funds from maturing loans or
securities at lower interest rates. As a result, the institution earns less
income in the future, which reduces its profit and overall earnings.
3 Explain the process of determining interest rate. Why is it difficult to forecast the interest
rate change? [Final Exam-2024]
 Process of Determining Interest Rate
Interest rates are determined in the financial marketplace through the
interaction of:
1. Demand for loanable funds (borrowers)
2. Supply of loanable funds (lenders)
The equilibrium point where demand equals supply determines the
market interest rate (price of credit).
In granting loans, financial institutions are on the supply side of the loanable
funds (credit) market. Similarly, financial institutions also come into the
financial marketplace as demanders of loanable funds (credit) when they offer
deposit services to the public to raise funds for lending and investing.

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As shown in above graph, the interest rate (the price of credit) tends to settle
at the point where the quantity of loanable funds demanded by borrowers
equals the quantity supplied by lenders.
Banks also determine their lending rates based on four key components :
a. Cost of funds (borrowing cost)
b. Non-fund operating costs
c. Risk premium
d. Desired profit margin
For risky borrowers, banks start with a risk-free rate (based on treasury bills)
and add premiums for various risks.
 Difficulties in Forecasting Interest Rate Changes
Forecasting interest rate changes is extremely difficult for following reasons :
1. Complex Interactions
Interest rates are the outcome of the daily interactions of thousands of
credit suppliers and demanders. This complex system is virtually
impossible to model with consistent accuracy.
2. Multiple Components
Any interest rate is made up of several basic parts. These include the real
interest rate, inflation, and different types of risk premiums such as default
risk, inflation risk, liquidity risk, and maturity risk. Each of these
components can change over time, sometimes unpredictably, because the
expectations and perceptions of lenders and borrowers keep changing.
3. Non-Parallel Shifts
Yield curves do not move in a parallel fashion. Short-term interest rates
tend to rise or fall faster and over a wider range than long-term interest
rates, making it difficult to predict how the entire rate structure will
change.

4 How does the interest rate risk affect the value of a firm? [Midterm 2, Final Exam : 2023]
 Interest Rate Risk Affects the Value of a Firm
Interest rate risk affects the value of a firm mainly through its impact on profits,
asset values, and capital. The effects can be explained clearly as follows:
1. Decline in Asset Value
Interest rates and asset values have an inverse relationship. When interest
rates increase, the present value of future cash flows falls. This reduces the
market value of assets (like loans, bonds, and investments).
2. Reduction in Profitability
Interest rate risk affects both income and expenses :
 Interest expense rises (higher cost of borrowing)

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 Interest income may fall (due to reinvestment at lower rates or

reduced lending)
Since firm value depends heavily on expected profits, this leads to a decline
in firm valuation.
3. Impact on Capital (Net Worth)
Losses from declining asset values are absorbed by capital, which reduces
the firm’s net worth.
4. Reinvestment and Reborrowing Risk
Interest rate fluctuations create two key problems:
 Reinvestment risk: Funds reinvested at lower returns than expected
 Reborrowing (refinance) risk: Cost of borrowing becomes higher
than returns
5. Increased Default Risk
High interest rates increase borrowing costs for customers, which makes
projects less profitable and raises loan default probability.

5 What is it that a lending institution wishes to protect from adverse movements in

interest rates? What is the goal of hedging?
 Protection from adverse movements in Interest Rates
Changes in market interest rates can damage a financial firm’s profitability by
increasing its cost of funds, by lowering its returns from earning assets and by
reducing the value of the owners’ investment.
Therefore, a financial institution wishes to protect both the value of assets and
liabilities, and the revenues and costs generated by both assets and liabilities
from adverse movements in interest rates.
 Goal of Hedging
The goal of hedging in banking is to protect profits by keeping the difference
between asset returns and liability costs stable. It also helps offset losses on
some assets with gains from other transactions, ensuring the bank achieves
its target rate of return.
6 Explain the concept of gap management? Give some examples of repriceable and
nonrepriceable assets and liabilities.
 Concept of Gap Management
- Gap management involves analyzing the maturities and repricing
opportunities of a bank’s interest-bearing assets and liabilities.
- When the amount of assets that can be repriced or mature within a given
period differs from the amount of liabilities, a gap arises. This gap exposes the
bank to potential losses due to unfavorable movements in interest rates,
depending on both the size and direction of the gap.

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- If an organization is highly exposed to interest rate fluctuations, management

will attempt to reduce this risk by aligning, as closely as possible, the volume
of repricing assets with the volume of repricing liabilities.
 Examples of repriceable and nonrepriceable assets and liabilities
Repriceable (Interest-Sensitive)
Nonrepriceable Assets
Assets
1. Short-term securities issued by 1. Cash in the vault and deposits at the
governments and private borrowers Central Bank (legal reserves);
(about to mature); 2. Long-term loans made at a fixed
2. Short-term loans made to borrowing interest rate;
customers (about to mature); 3. Long-term securities carrying fixed
rates;
3. Variable-rate of loans and securities;
4. Buildings and equipment;

Repriceable (Interest-Sensitive)
Nonrepriceable Liabilities
Liabilities
1. Borrowings from the money market; 1. Demand deposits (which pay no
2. Short-term savings accounts; interest rate or a fixed interest rate);
2. Long-term savings and retirement
3. Money-market deposits (whose accounts;
interest rates are adjustable
3. Equity capital provided by the financial
frequently);
institution’s owners;

7 When is a financial firm asset sensitive? Liability sensitive?

 Asset Sensitive Firm
If interest-sensitive assets in each planning period (day, week, month, etc.)
exceed the volume of interest-sensitive liabilities subject to repricing, the
financial firm is said to have a positive gap and to be asset sensitive. That
means :
Asset-sensitive (positive) gap= Interest-sensitive Assets
 
0
 Interest-sensitive Liabilities 

For example, a bank with interest-sensitive assets of $500 million and interest-
sensitive liabilities of $400 million is asset sensitive with a positive gap of $100
million.
 Liability Sensitive Firm
If an interest-sensitive firm’s liabilities are larger than its interest-sensitive assets,
the firm then has a negative gap and is said to be liability sensitive. That means :
Liability-sensitive (negative) gap= Interest-sensitive Assets
 
0
 Interest-sensitive Liabilities 

For example, a bank with interest-sensitive assets of $150 million and interest-
sensitive liabilities of $200 million is liability-sensitive with a negative gap of
$50 million.

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8 Commerce National Bank reports interest-sensitive assets of $870 million and interest-
sensitive liabilities of $625 million during the coming month. Is the bank asset sensitive or
liability sensitive? What is likely to happen to the bank’s net interest margin if interest
rates rise? If they fall?
 Here, Commerce National Bank’s interest-sensitive assets are $870 and interest-
sensitive liabilities are $625. Because interest-sensitive assets are larger than
liabilities by $245 ($870-$625)million, the bank is asset sensitive.
If interest rates rise, the bank's net interest margin should rise as asset
revenues increase more than the resulting increase in liability costs.
On the other hand, if interest rates fall, the bank's net interest margin will fall
as asset revenues decline faster than liability costs.
9 How do you measure the dollar interest-sensitive gap? The relative interest-sensitive
gap? What is the interest sensitivity ratio?
 Dollar Interest-Sensitive Gap
The dollar interest-sensitive gap (Dollar IS GAP) is measured by taking the
repriceable (interest-sensitive) assets (ISA) minus the repriceable (interest-
sensitive) liabilities (ISL) over some set planning period. Common planning
periods include 3 months, 6 months and 1 year.
Dollar IS GAP =  ISA - ISL 

 Relative Interest-Sensitive Gap

The relative interest-sensitive gap is the dollar interest-sensitive gap divided by
the size of a financial institution (often total assets).
Dollar IS GAP
Relative IS GAP =
Size of financial institution
A Relative IS GAP greater than zero (>0) means the institution is asset sensitive,
while a negative (<0)Relative IS GAP describes a liability-sensitive financial firm.
 Interest-Sensitive Ratio
The interest-sensitivity ratio is just the ratio of interest-sensitive assets (ISA) to
interest sensitive liabilities (ISL).
ISA
Interest Sensitivity Ratio, ISR=
ISL

10 What is duration? How is a financial institution’s duration gap determined?

 Duration
Duration is a value-weighted and time-weighted measure of maturity that
considers the timing of all cash inflows from earning assets and all cash outflows
associated with liabilities.
It measures the average maturity of a promised stream of future cash payments.
It is a direct measure of price risk.

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 Determination of Duration Gap

A financial institution’s duration gap is determined by taking the difference
between the dollar-weighted duration of its assets portfolio and the dollar
weighted duration of its liabilities.
The duration of the institution’s assets can be determined by taking a weighted
average of the duration of all of the assets in its portfolio. The weight is the
dollar amount of a particular type of asset out of the total dollar amount of the
assets of the financial institution. The duration of the liabilities can be
determined in similar manner.

11 What are the advantages of using duration as opposed to interest-sensitive gap

analysis? How can you tell if you are fully hedged using duration gap analysis? What are
the principal limitations of duration gap analysis?
 Advantages of Duration over ISA
Interest-sensitive gap analysis only looks at the impact of changes in interest
rates on the bank’s net income. It does not take into account the effect of interest
rate changes on the market value of the bank’s equity capital position.
Whereas, duration provides a single number which determines overall exposure
to interest rate risk of the bank. It can be used for hedging against the interest
rate risk, and also measure the sensitivity of the market value of financial
instruments to changes in interest rates.
 Hedged in Duration Gap Analysis
When the dollar weighted duration of the assets portfolio of the bank equals the
dollar weighted duration of the liability portfolio, then one can say fully hedged.
This means that the bank has a zero duration gap position when it is fully
hedged.
 Limitations of Duration Gap Analysis
There are several limitations with duration gap analysis, such as :
1. Finding assets and liabilities of the same duration can be difficult.
2. Some assets and liabilities may have patterns of cash flows that are not
well defined.
3. Customer prepayments may distort the expected cash flows in duration.
4. Customer defaults may distort the expected cash flows in duration.
5. Convexity can cause problems.

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Mathematical Problems with Solutions

Formula # 1 : To calculate Discount Rate (DR) and Yield of Maturity (YTM)

 100  Purchase price on loan or security  360
DR=   
 100  Number of days to maturity

 100  Purchase Price  365

YTM= 
Purchase Price   Days to Maturity
 

Problem # 1
U.S. Treasury bills are available for purchase this week at the following prices (based upon
$100 par value) and with the indicated maturities:
a. $97.25, 182 days.
b. $95.75, 270 days.
c. $98.75, 91 days.
Calculate the bank discount rate (DR) on each bill if it is held to maturity. What is the
equivalent yield to maturity (sometimes called the bond-equivalent or coupon-equivalent
yield) on each of these Treasury Bills?
 Solution :
(a). Purchase price = $97.25, Days to Maturity = 182
 100  Purchase price  360
Discount Rate,DR=   
 100  Days to maturity
 100  97.25  360 2.75  1.98 5.44
   182    5.44%
 100  100 100

 100  Purchase price  365

Yields to Maturity,YTM=   
 Purchase Price  Days to maturity
 100  97.25  365
 
 97.25  182
2.75
  2.005  0.028  2.005  0.0567  5.67%
97.25
(b). Purchase price = $95.75, Days to Maturity = 270
 100  Purchase price  360
Discount Rate,DR=   
 100  Days to maturity
 100  95.75  360 4.25  1.33 5.67
   270    5.67%
 100  100 100
 100  Purchase price  365
Yields to Maturity,YTM=   
 Purchase Price  Days to maturity
 100  95.75  365
   270
 95.75 
4.25
  1.35  0.044  1.35  0.06  6.00%
95.75

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(c). Purchase price = $98.75, Days to Maturity = 91

 100  Purchase price  360
Discount Rate,DR=   
 100  Days to maturity
 100  98.75  360 1.25  3.96 4.96
   91    4.96%
 100  100 100

 100  Purchase price  365

Yields to Maturity,YTM=   
 Purchase Price  Days to maturity
 100  98.75  365
   91
 98.75 
2.25
  4.011  0.013  4.01  0.0508  5.08%
98.75

Formula # 2 : To calculate Net Interest Margin (NIM)

 Interest income from loans and investments 
  Interest expense on deposits and other borrowed funds 
NIM=  
 Total earning assets 
 
 Net Interest income 
 NIM=  
 Total earning assets 

Problem # 2
First National Bank of Bannerville has posted interest revenues of $63 million and interest
costs from all of its borrowings of $42 million. If this bank possesses $700 million in total
earning assets, what is First National’s net interest margin? Suppose the bank’s interest
revenues and interest costs double, while its earning assets increase by 50 percent. What will
happen to its net interest margin?
 Solution :
Given that, Interest Income = $63 million
Interest Expenses = $42 million
Total Earning Assets = $700 million
 Interest income  Interest expense  $63  $42 21
Net Interest Margin, NIM= 
Total earning assets
 = $700  700  0.03  3%
 
If the bank’s interest revenues and interest costs become double, also total earning
assets increase by 50%, then
Interset Income  $63  2 = $126 million
Interset Expense  $42 2 = $84 million
Total Earning Assets  $700  700 0.50=$(700+350)=$1,050 million
$126  $84 42
Net Interest Margin, NIM=   0.04  4%
$1,050 1050

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Formula # 3 : Calculation of Interest Sensitive Gap (IS GAP), ISR

Dollar IS GAP =  ISA - ISL 
Dollar IS GAP
Relative IS GAP =
Size of financial institution
ISA
Interest Sensitivity Ratio, ISR=
ISL
where,ISA = Interest-Sensitive Assets
ISL = Interest-Sensitive Liabilities

Problem # 3
Suppose Carroll Bank and Trust reports interest-sensitive assets of $570 million and interest-
sensitive liabilities of $685 million. What is the bank’s dollar interest-sensitive gap? Its
relative interest-sensitive gap and interest-sensitivity ratio?
 Solution : Given that,
Interest-sensitive assets, IAS = $ 570 million
Interest-sensitive liabilities, IAL = $ 685 million
 Dollar Interest-Sensitive Gap
Dollar IS GAP =  ISA - ISL  $570  $685 million  -$115 million
 Relative Interest-Sensitive Gap
Dollar IS GAP $115 milion
Relative IS GAP    0.2018
Size of financial institution (Assets) $570 million
 Interest-Sensitive Ratio
ISA $570 million
Interest Sensitivity Ratio, ISR=   0.8321
ISL $685 million

Problem # 4
ABC Bank has interest-sensitive assets of $400 million, interest sensitive liabilities of $325
million and total assets of $500 million. What is the bank’s dollar interest-sensitive gap? What
is the relative interest sensitive gap? What is the value of interest sensitivity ratio? Is it asset
sensitive or liability sensitive? Under what scenario for market interest rates will the bank
experience a gain and loss in net interest income? [Final Exam : 2022]
 Solution : Given that,
Interest-sensitive assets, IAS = $400 million
Interest-sensitive liabilities, IAL = $325 million
Total Assets = $500 million
 Dollar Interest-Sensitive Gap
Dollar IS GAP = ISA - ISL   $400  $325 million  $75 million
 Relative Interest-Sensitive Gap
Dollar IS GAP $75 milion
Relative IS GAP    0.15
Size of financial institution (Assets) $500 million

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 Interest-Sensitive Ratio
ISA $400 million
Interest Sensitivity Ratio, ISR=   1.23
ISL $325 million
 Here, the interest sensitivity gap is positive as well as relative IS GAP greater than
zero, so it is asset sensitive.
 There will be a gain in net interest income if the market interest rates are rising,
becuase asset returns increase more than liability costs.
 There will be a loss in net interest income, if the market interest rates are falling,
because asset returns decrease more than liability costs.

Formula # 4 : Calculation of Change in Net Interest Income (NII)

 Overall change in   Size 
 Change in net    
=
interest income   interest rate of the
  
(in percentage points) cumulative gap

Problem # 5
Peoples’ Savings Bank has a cumulative gap for the coming year of + $135 million, and interest
rates are expected to fall by two and a half percentage points. Can you calculate the expected
change in net interest income that this thrift institution might experience? What change will
occur in net interest income if interest rates rise by one and a quarter percentage points?

 Solution : Given that, Size of the Cumulative Gap = +$135 million

Change in net interest rate = -2.50% = -0.025

Change in net interest income =  0.025  +135 million =  $3.38 million

Therefore, the net interest income will decrease by $3.38 million.
If change in net interest rate raise by +1.25%, then:
Change in net interest income
= +1.25%   +135 million 
=+0.0125× +135 million =+$1.69 million
Therefore, the net interest income will increase by $1.69 million.

Formula # 5 : Calculation of Percentage Change in Market Price

P i
=  D
P   i
1
P
where,  Percentage change in market price, D  Duration
P
i
 Relative change in interest rates associated with the asset or liability
1  i 

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Problem # 6
A bond held by a savings institution that carries a duration of four years and a current market
value (price) of $1,000. Market interest rates attached to comparable bonds are about 10
percent currently, but recent forecasts suggest that market rates may rise to 11 percent. If this
forecast turns out to be correct, what percentage change will occur in the bond’s market value?
 Solution :
Given that,
Duarion, D = 4 years
Current Interest Rate = 10% =0.10
Future Interest Rate = 11% =0.11
Interest Rate Change, i  0.11  0.10  0.01

Percentage change in the bond’s market value,

P i 0.01
=  D  4 
P 1  i  1  .10
0.01
 4   4  0.0091  0.0364  3.64%
1.10
Therefore, 3.64% change will ocuur in the bond’s market value.
Here, Current Market Value = $1,000
If interest rate change from 10% to 11%, the market value will be
change to $1,000  3.64 =  $ 36.40
New Market Value = $1,000-$36.40=$963.60

Problem # 7
Carter National Bank holds $15 million in government bonds having a duration of 12 years. If
interest rates suddenly rise from 6 percent to 7 percent, what percentage change should occur in
the bonds’ market price?

 Solution :
Given that,
Duarion, D = 12 years
Current Interest Rate = 6% =0.06, New Interest Rate = 7% =0.07
Interest Rate Change, i  0.07  0.06  0.01

Percentage change in the bond’s market price,

P i 0.01
=  D  12
P 1  i  1  0.06 
0.01
 12  12 0.0094  00.1132  11.32%
1.06
Therefore, the market price will change approximately by 11.32%.

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Formula # 6 : Leverage-Adjusted Duration Gap and change in Net Worth

 Total Liabilities 
Leverage-Adjusted Duration Gap=DA   DL 
 Total Assets 
 i   i 
NW   DA   A    DL   L

 1  i    1  i  
Where, NW  Change in Net Worth
DA  Average duration of assets, DL  Average duration of liabilities
i  Original interest rate, i  Changge in interest rate
A  Total Assets, L  Total Liabilities

Problem # 8
Suppose that a savings institution has an average asset duration of 2.5 years and an average
liability duration of 3.0 years. If the savings institution holds total assets of $560 million and total
liabilities of $467 million, does it have a significant leverage-adjusted duration gap? If interest
rates rise, what will happen to the value of its net worth?

 Solution : Given than, Average Asset duration, DA = 2.5 years

Average Liability duration, DL = 3.0 years
Total Assets = $560 million
Total Liabilities = $467 million
Leverage-Adjusted Duration Gap
 Total Liabilities 
=DA   DL 
 Total Assets 
 467 
=2.50   3.0  2.50  2.5018  0.0018 Years
 560 
Therefor, the savings institution has a very slight negative duration gap; so it could be
considered insignificant.
 If interest rates rise, the savings institution's liabilities will fall slightly more
in value than its assets, resulting in a small increase in net worth.
Problem # 9
Asia Bank Limited has the average asset duration of 3 years and liability duration of 2 years.
Total assets and liabilities are of $300 million and $250 million respectively. Calculate the
leverage-adjusted duration gap. What will happen to the Bank’s net worth if the interest rate
first rises from 8% to 10% and then falls to 6%? Final Exam-2024

 Solution : Given than, Average Asset duration, DA = 3 years

Average Liability duration, DL = 2 years
Total Assets = $300 million, Total Liabilities = $250 million
Leverage-Adjusted Duration Gap
 Total Liabilities 
=DA   DL 
 Total Assets 
 250 
=3   2  3  2 0.833  3  1.67  1.33 Years
 300 

Therefor, the leverage-adjusted duration gap is 1.33 years. (Ans)

Md. Anisur Rahman Page 14/16

MPB-503 : Risk Management in Banks Risk Management for Interst Rates

If Interest Rates Rises from 8% to 10% the net worth would be :

 i   i 
NW   DA   A    DL   L
 1  i    1  i  
 10%  8%   10%  8% 
  3  $300   2  $250
 1  8%   1  8% 
 2%   2% 
  3  $300  2  $250
 1  8%   1  8% 
 0.02   0.02 
  900     500 
 1.08   1.08 
 16.67  9.26  $7.41 million

Therefor, if the interest rate rises from 8% to 10% then the bank's net worth
would fall by approximately $7.41 million.
If Interest Rates falls from 8% to 6% the net worth would be :
 i   i 
NW   DA   A   DL   L

 1  i    1  i  
 6%  8%   6%  8% 
  3  $300   2  $250
 1  8%   
1  8%  

 2%   2% 
  3  $300   2  $250
 1  8%   1  8% 
0.02   0.02 
  900    500 


1.08   1.08 
 16.67  9.26  $7.41 million
Therefor, if the interest rate falls from 8% to 6% then the bank's net worth
would increase by approximately $7.41 million.

Problem # 10
ABC bank has an average asset duration of 3.25 years and an average liability duration of 1.75
years. Its liabilities amount to Tk 485million and assets amount to Tk 512 million. Suppose
interest rate was 7 percent and then rise to 8 percent. What will happen to the bank’s net
worth as a result of a decline in interest rate? Final Exam-2023
 Solution
Given than, Average Asset duration, DA = 3.25 years
Average Liability duration, DL = 1.75 years
Total Assets = $512 million
Total Liabilities = $485 million

Leverage-Adjusted Duration Gap

 Total Liabilities 
=DA   DL 
 Total Assets 
 485 
=3.25   1.75  3.25  1.66  1.59 Years
 512 

Md. Anisur Rahman Page 15/16

MPB-503 : Risk Management in Banks Risk Management for Interst Rates

If Interest Rates Rises from 7% to 8% , the net worth would be :

 i   i 
NW   DA   A    DL   L
 1  i    1  i  
 8%  7%   8%  7% 
  3.25  $512   1.75  $485
 1  7%   1  7% 
 1%   1% 
  3.25  $512   1.75  $485
 1  0.07   1  0.07 
 0.01   0.01 
  1,664     848.75
 1.07   1.07 
 15.55  7.93  $7.62 million
Therefor, if the interest rate rises from 7% to 8% then the bank's net worth would
fall by approximately $7.62 million.
So, for a 1 percentage point decline (from 7% to 6%), the net worth would rise by
approximately Tk 7.62 million. The positive leverage-adjusted duration gap (1.59
years) indicates that net worth is positively related to interest rate decreases.
If Interest Rates falls from 8% to 6% :
 i   i 
NW   DA   A   DL   L

 1  i    1  i  
 6%  8%   6%  8% 
  3  $300   2  $250
 1  8%   
1  8%  

 2%   2% 
  3  $300   2  $250
 1  8%   1  8% 
0.02   0.02 
  900    500 


1.08   1.08 
 16.67  9.26  $7.41 million
Therefor, if the interest rate falls from 8% to 6% then the bank's net worth would
increase by approximately $7.41 million.


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