. What is the maturity gap for Nearby Bank? b. Is Nearby Bank more exposed to an increase or decrease in interest rates? c. Explain why.
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A depository institution (bank) has $1 billion in assets and 10% in capital. It has funded itself through capital, checking accounts ($450 million) with an average duration of one (1) month, and short-term certificates of deposit ($450 million) with an average duration of 3 months and an average maturity of 6 months. What is the average duration of its liabilities? If the bank's portfolio manager thinks that interest rates are going to fall substantially, should she/he invest in 3-month U.S. Treasury notes? Why? (Please explain your answer)
Akash M.
State Bank's balance sheet is listed below. Market yields and durations (in years) are in parenthesis, and amounts are in millions. Assets Liabilities and Equity Cash $31 Demand deposits $253 Fed funds (2.05%, 0.02) 150 Savings accounts (0.5%, 1.25) 50 3-month T-bills (3.25%, 0.22) 200 MMDAs (3.5%, 0.50) 8-year T-bonds (6.50%, 7.55) 250 (no minimum balance requirement) 460 5-year munis (7.20%, 4.25) 50 3-month CDs (3.2%, 0.20) 175 6-month consumer loans (5%, 0.42) 250 1-year CDs (3.5%, 0.95) 375 5-year car loans (6%, 3.78) 350 5-year CDs (5%, 4.85) 350 7-month C&I loans (4.8%, 0.55) 200 Fed funds (2%, 0.02) 225 2-year C&I loans (4.15%, 1.65) 275 Repos (2%, 0.05) 290 Fixed-rate mortgages (5.10%, 0.48) 6-month commercial paper (maturing in 5 months) 450 (4.05%, 0.55) 300 Fixed-rate mortgages (6.85%, 0.85) Subordinate notes: (maturing in 1 year) 300 1-year fixed rate (5.55%, 0.92) 200 Fixed-rate mortgages (5.30%, 4.45) Subordinated debt: (maturing in 5 years) 275 7-year fixed rate (6.25%, 6.65) 100 Fixed-rate mortgages (5.40%, 18.25) Total liabilities $2,778 (maturing in 20 years) 355 Premises and equipment 20 Equity 378 Total assets $3,156 Total liabilities and equity $3,156 Assume savings accounts and MMDAs are rate-sensitive liabilities. a. What is the repricing gap if the planning period is six months? One year? b. What is State Bank's duration gap? c. What is the impact over the next six months on net interest income if interest rates on RSAs increase 50 basis points and on RSLs increase 35 basis points? Explain the results. d. What is the impact over the next year on net interest income if interest rates on RSAs decrease (increase) 35 basis points and on RSLs decrease (increase) 50 basis points? Explain the results. e. Use these duration values to calculate the expected change in the value of the assets and liabilities of State Bank for a predicted decrease of 0.35 percent in interest rates on assets and 0.50 percent on liabilities. f. What is the change in equity value forecasted from the duration values for decrease of 0.35 percent in interest rates on assets and 0.50 percent on liabilities? g. Use the duration gap model to calculate the change in equity value if the relative change in all market interest rates is a decrease of 50 basis points.
Madhur L.
The balance sheet of Wollongong FI is listed below. Market yields are in parentheses. Assets (Million $) Liabilities and Equity (Million $) Cash 20 1-month repos (1.0%) 240 1-month T-bills (7.05%) 150 2-year CD (6.0%) 100 3-month T-bills (7.25%) 150 Subordinated debt 3-year fixed rate (8.55%) 300 2-year T-notes (7.50%) 100 8-year Loan (8.96%) 200 5-year munis (floating rate reset, reset every 6 months) 50 Equity 30 Total liabilities and equity 670 Required: a. What is the repricing gap if the planning period is 30 days? 3 months? 2 years? (3 marks) b. What is the impact over the next three months on net interest income if interest rate decreases by 50 basis points on both RSAs and RSLs? (1 mark) c. What is the impact over the next two years on net interest income if interest rates on RSAs increase by 50 basis points and on RSLs increase by 60 basis points? (2 marks) d. Calculate the average maturity gap of this balance sheet. (2 marks) e. According to the maturity gap, is the Wollongong FI exposed to an increase or decrease in interest rate risk? Explain why? (2 marks)
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