As the new management trainee at the Rossville Bank of Tennessee, you are given the book value balance sheet, you have been asked by the bank president to determine the current mark-to-market balance sheet and modified durations for the banks assets and liabilities. Fill in the blanks with market values and modified durations. Some of this information is already filled in. The bank has only three types of assets and two types of deposits. Amounts are in $ thousands and duration in years.

Rossville Bank of Tennessee

Statement of Financial Condition

(December 1, 2018)

Assets (000) Book Value Market Value Modified Duration

Cash & Reserves $ 50 $ 50 0

One-Year Maturity Loans* $ 450 $ ________ ________

Two-Year Maturity Loans** $ 500 $_________ ______

Total Assets $1,000 $__________

* One-year maturity loans were made recently, where an interest rate of 8.0% will be paid at the end of the year; however, if these loans were made today the market interest rate (todays rate) would be 7.0% - the loans will mature in exactly one year when all annual principal and interest will be received.

** Two-year loans were made when interest rates were at 8%; however, if these loans were made today, the market rate would be 7% - the loans will mature in two years and will be amortized in two equal annual payments.

Liabilities&Net Worth(000) Book Value Market Value Modified Duration

Demand Deposits $ 500 $ 500 0

One-Year CDs*** $ 440 $ ________ _______

*** One-Year CDs were deposited yesterday by one of the areas investors at an interest rate of 4%. Bothprincipal and interest (of 4%) will be paid in one year at maturity. The market yield on these CDs is still 4% today.

Common Stock $ 40

Accum Retained Earnings $ 20 MVE****___________

Total Liab & Net Worth $1000 $____________

**** MVE is market value of equity=MV of Assets minus MV if Liabilities.

Calculate and fill in the blanks above for Market Values and Modified Durations: of Assets, Liabilities and Equity.

What is the modified duration and the market value of the one-year maturity loan?

MV One-Year Maturity Loans*=

Modified Duration =

What is the modified duration and the market value of the two-year maturity amortized loan with two equal annual payments, a par value of $500 originally issued with an interest rate of 8%, but if issued today would yielding 7%. Place all values in the mark-to-market balance sheet above.

Loan payment =

Year(t) Payment (1.075)^-t PV t*PV

1

2

P=__________ __________

Duration =

Modified Duration =

What is the modified duration and the market value of the one-year maturity CDs?

MV One-Year Maturity CDs=

Modified Duration =

What are the weighted average modified durations of both Assets and Liabilities?

D_MA =

D_ML =

Using weighted average modified durations for the banks assets and liabilities, what will be the change in the market value of net worth or equity, (E) if interest rates were to increase by 200 basis points (r=2%). Assume a parallel shift in the yield curve. Where

f. What are possible approaches available to the bank to immunize balance sheet interest rate risk?

00/1 (1.085)-2/0.085