Answered step by step
Verified Expert Solution
Question
1 Approved Answer
help with q2 Question 2- Income Gap + Overall Duration Gap [17 marks] (a) Consider the following balance sheet of Banco Credit: Assets (S) Duration
help with q2
Question 2- Income Gap + Overall Duration Gap [17 marks] (a) Consider the following balance sheet of Banco Credit: Assets (S) Duration (years) Variable rate mortgages 250 9.2 Fixed rate mortgages 170 5.2 Commercial loans 790 4.5 Physical capital 300 Total 1510 (S) 4 50 300 100 660 1510 0.8 2.7 11 Liabilities Duration (years) Money market deposits Savings deposits Variable rate CDs Equity Total Assumptions Fixed rate mortgages repaid in the coming year = 25% Savings deposits that become rate sensitive in the coming year = 20% All commercial loans are rate sensitive All money market deposits are rate sensitive Using income gap analysis, calculate the change in net interest income over the coming year if interest rates increase by 1% from 4% to 5% (4 marks) (b) What is the duration gap for Banco Credit? (4 marks) (c) What is the estimated change in the value of equity (in $s) for Banco Credit if interest rates increase by 1% from 4% to 5%? (4 marks) (d) Explain why a bank with a positive duration gap is estimated to see a fall in the value of its equity when interest rates increase
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started