Slide MGT305 Slide07

Interest Rate Risk
Chapter VII

The Management of Net
Interest Income
Rates offered by a bank to its customers
Maturity (years)
1
5

Deposit rate
3%
3%

Mortgage rate
6%
6%

Rates after five-year rates are increased
Maturity (years)
1

5

Deposit rate
3%
4%

Mortgage rate
6%
7%

LIBOR and Swap Rates
• LIBOR stands for the London Interbank
Offered Rate.
• This is the rate at which a bank is
prepared to lend to another bank.
• Extension of LIBOR uses swap.

Macaulay's Duration

Duration

Duration