1. Balance sheet question

Suppose you open a bank with Patrick Newman (senior partner, of course). You and other partners put in $400,000 of your own savings. You also borrow $600,000 from customers in the form of certificates of deposit. You buy $150,000 of corporate bonds and make $750,000 in loans to various customers. You keep the rest as cash.

a. Write out the balance sheet. Make sure you have everything clearly labeled and list the total value of assets and equity plus liabilities.

1. What is the banks BA-BC ratio?

2. Suppose the bank makes a profit of $200,000 at the end of the first year. What is the banks return on assets? What is the banks return on equity?

c. Suppose the bank makes a profit of $200,000 at the end of the first year. What is the banks return on assets? What is the banks return on equity?

d. If all of the corporate bonds and 25% of the loans to various customers are variable rate, and all of the money borrowed from CDs are variable rate, use gap analysis to calculate whether or not the bank has a positive or negative gap (and specify its size)

e. Suppose the average maturity on its assets is 3 years and the average maturity on its liabilities is 1 year. Use duration analysis to calculate whether or not the bank has a positive or negative duration gap (also specify how large it is).