KGKA Bank's balance sheet is as below. The yields and durations (in years) of each asset and liability are in parentheses, and amounts are in millions. (For example: The yield of Fed funds is 2.05% and its duration is 0.02 year) Assets $M Liabilities and Equity $M Cash 62 Demand deposits 506 Fed funds (2.05%, 0.02) 300 Savings accounts (0.5%, 1.25) 100 3-month T-bills (3.25%, 0.22) 400 Money Market Demand Account (no min 920 8-year T-bonds (6.50%, 7.55) 500 balance requirement) (3.5%, 0.50) 5-year munis (7.20%, 4.25) 100 3-month CDs (3.2%, 0.20) 350 6-month consumer loans (5%, 0.42) 500 1-year CDs (3.5%, 0.95) 750 5-year car loans (6%, 3.78) 700 5-year CDs (5%, 4.85) 700 7-month C&I loans (4.8%, 0.55) 400 Fed funds (2%, 0.02) 450 2-year C&l loans (4.15%, 1.65) 550 Repos (2%, 0.05) 580 Fixed-rate mortgages (5.10%, 0.48) 900 6-month commercial paper (4.05%, 0.55) 600 (maturing in 5 months) Fixed-rate mortgages (6.85%, 0.85) 600 Subordinate notes: 400 (maturing in 1 year) 1-year fixed rate (5.55%, 0.92) Fixed-rate mortgages (5.30%, 4.45) 550 Subordinated debt: (maturing in 5 years) 7-year fixed rate (6.25%, 6.65) Fixed-rate mortgages (5.40%, 18.25) 710 Total liabilities 5556 (maturing in 20 years) Premises and equipment 40 Equity 756 Total assets $6,312 Total liabilities and equity $6312 200 Required: a. What is KGKA Bank's repricing gap if the planning period is six months? One year? (6 marks) b. What is KGKA Bank's leverage adjusted duration gap? (3 marks) C. What is the impact over the next six months on net interest income if interest rates on RSAs increase 50 basis points and on RSLs increase 35 basis points? Explain the results. (2 marks) d. What is the impact over the next year on net interest income if interest rates on RSAs decrease 35 basis points and on RSLs decrease 50 basis points? Explain the results. (2 marks) e. Use the duration values and the yields in the balance sheet to calculate the expected change in the value of the assets and liabilities of KGKA Bank for a predicted interest rate decrease of 0.35 on assets and 0.50 percent on liabilities. [hints: you should use duration model AP = -D x P x AR/(1+R) to calculate the value change for each asset (liability) and then sum the value changes for total assets (liabilities). (5 marks) f. What is the change in equity value forecasted from the duration values for decrease of 0.35 percent in interest rates on assets and 0.50 percent on liabilities? (hints: this can be done by using the results in 'e' above] (2 marks) g. Use the duration gap model to calculate the change in equity value if the relative change in all market interest rates is a decrease of 50 basis points. (2 marks) KGKA Bank's balance sheet is as below. The yields and durations (in years) of each asset and liability are in parentheses, and amounts are in millions. (For example: The yield of Fed funds is 2.05% and its duration is 0.02 year) Assets $M Liabilities and Equity $M Cash 62 Demand deposits 506 Fed funds (2.05%, 0.02) 300 Savings accounts (0.5%, 1.25) 100 3-month T-bills (3.25%, 0.22) 400 Money Market Demand Account (no min 920 8-year T-bonds (6.50%, 7.55) 500 balance requirement) (3.5%, 0.50) 5-year munis (7.20%, 4.25) 100 3-month CDs (3.2%, 0.20) 350 6-month consumer loans (5%, 0.42) 500 1-year CDs (3.5%, 0.95) 750 5-year car loans (6%, 3.78) 700 5-year CDs (5%, 4.85) 700 7-month C&I loans (4.8%, 0.55) 400 Fed funds (2%, 0.02) 450 2-year C&l loans (4.15%, 1.65) 550 Repos (2%, 0.05) 580 Fixed-rate mortgages (5.10%, 0.48) 900 6-month commercial paper (4.05%, 0.55) 600 (maturing in 5 months) Fixed-rate mortgages (6.85%, 0.85) 600 Subordinate notes: 400 (maturing in 1 year) 1-year fixed rate (5.55%, 0.92) Fixed-rate mortgages (5.30%, 4.45) 550 Subordinated debt: (maturing in 5 years) 7-year fixed rate (6.25%, 6.65) Fixed-rate mortgages (5.40%, 18.25) 710 Total liabilities 5556 (maturing in 20 years) Premises and equipment 40 Equity 756 Total assets $6,312 Total liabilities and equity $6312 200 Required: a. What is KGKA Bank's repricing gap if the planning period is six months? One year? (6 marks) b. What is KGKA Bank's leverage adjusted duration gap? (3 marks) C. What is the impact over the next six months on net interest income if interest rates on RSAs increase 50 basis points and on RSLs increase 35 basis points? Explain the results. (2 marks) d. What is the impact over the next year on net interest income if interest rates on RSAs decrease 35 basis points and on RSLs decrease 50 basis points? Explain the results. (2 marks) e. Use the duration values and the yields in the balance sheet to calculate the expected change in the value of the assets and liabilities of KGKA Bank for a predicted interest rate decrease of 0.35 on assets and 0.50 percent on liabilities. [hints: you should use duration model AP = -D x P x AR/(1+R) to calculate the value change for each asset (liability) and then sum the value changes for total assets (liabilities). (5 marks) f. What is the change in equity value forecasted from the duration values for decrease of 0.35 percent in interest rates on assets and 0.50 percent on liabilities? (hints: this can be done by using the results in 'e' above] (2 marks) g. Use the duration gap model to calculate the change in equity value if the relative change in all market interest rates is a decrease of 50 basis points. (2 marks)