Question
Consider the following bank balance sheet and associated interest rates. The time frame is one year. Assets Amount Rate Liabilities & Equities Amount Rate Cash
Consider the following bank balance sheet and associated interest rates. The time frame is one year.
Assets | Amount | Rate | Liabilities & Equities | Amount | Rate |
Cash | $50,000 | 0% | Deposits | $150,000 | 0% |
Repos | 80,000 | .75% | 1 yr CDs | 100,000 | 1.2% |
Loans | 220,000 | 4.5% | LTD | 160,000 | 3.5% |
Buildings | 100,000 | Equity | 40,000 |
Calculate the banks static GAP, GAP ratio, and effective GAP as a percentage of earning assets, expected Net Interest Income, and Net Interest Margin if interest rates and portfolio composition remain constant. What is the interest rate risk? If the yield curves shift 2% higher because rates on assets rise faster than those on assets rise faster than those on liabilities. Recalculate all of the variables. Suppose that, instead, the rates rose by an even amount now what happened to the banks profitability? Now, suppose that the bank converts $20,000 from longer term debt (LTD) to 1yr CDs and Interest rates remain constant, what happened to all of the GAPs and profitability measures? Is this bank overly risky?
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