Question
Blue Sunday Bank has a portfolio of loans and securities, as well as deposits and money market borrowings, which are expected to produce the following
| Blue Sunday Bank has a portfolio of loans and securities, as well as deposits and money market borrowings, which are expected to produce the following cash inflows and outflows for the bank in the coming 5 years. Now assume that the bank has total assets of $30 billion and total liabilities of $25 billion, and all asset and liability cash flows are proportional to the cash flows given in the charts below. How much would the value of the bank change if interest rates rise from 4.5% to 5.0%? What about if interest rates change from 4.5% to 4.2%? Assume that the total assets and total liabilities have the same duration profile as the cash flows given in this problem. Show your calculations in a spreadsheet.
Duration of Total Cash Inflows | |||||||
| Expected Cash Flow | Cash Flow Timeline | Current Year | Present Value (4.5%) | Present Value | Weight | Duration | |
| 1900000 | 1 Year | 1 | 0.956937799 | 1818181.818 | 0.63258399 | 0.63258399 | |
| 750000 | 2 Years | 2 | 0.915729951 | 686797.4634 | 0.238951394 | 0.477902788 | |
| 350000 | 3 Years | 3 | 0.876296604 | 306703.8114 | 0.106708756 | 0.320126269 | |
| 65000 | 4 Years | 4 | 0.838561344 | 54506.48733 | 0.018963962 | 0.075855849 | |
| 10000 | 5 Years | 5 | 0.802451047 | 8024.510465 | 0.002791897 | 0.013959486 | |
| 2874214.091 | 1.520428382 | ||||||
| Duration is 1.520428 Years | |||||||
| Duration of Total Cash Outflows | |||||||
| Expected Cash Flow | Cash Flow Timeline | Current Year | Present Value (4.5%) | Present Value | Weight | Duration | |
| -1400000 | 1 Year | 1 | 0.956937799 | -1339712.919 | 0.531606644 | 0.531606644 | |
| -830000 | 2 Years | 2 | 0.915729951 | -760055.8595 | 0.30159502 | 0.60319004 | |
| -400000 | 3 Years | 3 | 0.876296604 | -350518.6416 | 0.139088036 | 0.417264108 | |
| -45000 | 4 Years | 4 | 0.838561344 | -37735.26046 | 0.014973592 | 0.05989437 | |
| -40000 | 5 Years | 5 | 0.802451047 | -32098.04186 | 0.012736708 | 0.06368354 | |
| -2520120.722 | 1.675638701 | ||||||
| Duration is 1.675639 Years | |||||||
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