An FI is planning the purchase of a $4 million loan to rise the average duration of its assets from 3.5 to 5.0 years. The FI currently has total assets worth $20 million, with $4 million in cash (duration of zero) and $16 million in loans.
A) Assuming the bank uses the cash to purchase the loan, should the bank purchase the loan if its duration is 8 years?
B) What duration loan should the FI purchase to obtain asset duration of 5?