(a)Consider the balance sheet for Northern Highland Credit Union (NHCU) before answering parts (i) through (v).

Assets ($ million)

$

Liabilities($ million)

$

Cash

10

Overnight interbank borrowing (7.00%)

170

T-notes 1 month (7.05%)

75

7 year fixed rate Subordinated debt (8.55%)

150

T-notes 3 months (7.25%)

75

T-notes two-year (7.50%)

50

Equity

15

T-notes 10-year (8.96%)

100

Corporate bonds

25

Total assets

335

Total liabilities and Equity

335

i.What is the repricing (funding) gap over the 0-to-one-year maturity bucket? (1 mark)

Repricing (funding) gap over 0-1 year planning period = (75+75+25)-170 = +$5 million

ii.What is the incremental and cumulative repricing gap over the one-year to twoyear maturity bucket? (2 marks)

iii.Calculate the impact on net interest income (in dollars) if interest rates increase 20 basis points for the repricing gap in part (i) and cumulative repricing gap in part (ii). (4 marks)

iv.What interest rate exposure a financial institution would have if (i) it has a negative repricing gap and (ii) it has a positive repricing gap? (4 marks)

v.If the duration of assets is 3.8 years and the duration of liabilities is 3.2 years, what is

the NHCU's duration gap and its interest rate risk exposure? (3 marks)

Explain the defensive approach to manage the bank's interest risk exposure when measured using the duration gap?