FIN 470 Assignment #9

1. Nearby Bank has the following balance sheet (in millions):

Assets Cash $325

5-year Treasury notes 30-year mortgages Total assets

Liabilities and Equity

Demand deposits $200 125 12-year certificates of deposit 200 50 Equity 100 $500 Total liabilities and equity $500

What is the maturity gap for Nearby Bank? Is Nearby Bank more exposed to an increase or decrease in interest rates? Explain why (i.e. is the bank short funded or long funded)?

2. A bank has the following balance sheet:

Assets Rate sensitive Fixed rate Nonearning

Total

$175,000 955,000 665,000

$1,795,000

Avg. Rate 7.75%

8.75

Liabilities/Equity Rate sensitive Fixed rate Nonpaying

$525,000 305,000 965,000

Avg. Rate 6.25%

7.50

Total

$1,795,000

Suppose interest rates fall such that the average yield on rate-sensitive assets decreases by 50 basis points and the average yield on rate-sensitive liabilities decreases by 35 basis points.

a) Calculate the banks repricing GAP (CGAP), gap to total assets and gap ratio. b) Assuming the bank does not change the composition of its balance sheet, calculate the

resulting change in the banks interest income, interest expense, and net interest income. c) Explain how the CGAP and spread effects influenced this change in net interest income.

3. What is a maturity gap? How can the maturity model be used to immunize (hedge) an FIs portfolio?

4. A bank has the following balance sheet:

Assets Rate sensitive Fixed rate Nonearning

Total

$975,000 325,000 200,000

$1,500,000

Avg. Rate 7.75%

8.75

Liabilities/Equity Rate sensitive Fixed rate Nonpaying

$500,000 700,000 300,000

Avg. Rate 6.25%

7.50

Total

$1,500,000

Suppose interest rates rise such that the average yield on rate-sensitive assets falls by 15 basis points and the average yield on rate-sensitive liabilities falls by 60 basis points.

1. a) Calculate the banks repricing GAP, gap to total assets ratio and gap ratio.

2. b) Assuming the bank does not change the composition of its balance sheet, calculate the

   resulting change in the banks interest income, interest expense, and net interest income.

3. c) Explain how the CGAP and spread effects influenced the change in net interest income.

5. If a bank manager is certain that interest rates were going to increase within the next six months, how should the bank manager adjust the banks maturity gap to take advantage of this anticipated increase? What if the manager believes rates will fall?