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Mountain Bank has the following (simplified) balance sheet. Amounts are in millions of dollars, and the % is the interest rate received (paid) on assets
Mountain Bank has the following (simplified) balance sheet. Amounts are in millions of dollars, and the % is the interest rate received (paid) on assets (liabilities).
Assets | Amount ($b) | % | Liabilities | Amount ($b) | % |
Rate-sensitive | 500 | 6% | Rate-sensitive | 240 | 3% |
Non-rate sensitive | 200 | 8% | Non-rate sensitive | 450 | 5% |
Non-earning | 50 |
| Equity | 60 |
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Total | 750 |
| Total | 750 |
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- What is the current (total) repricing GAP position? (1 mark)
- What happens to the banks net interest income if rates would fall by 1.5 percentage points? Show your calculation. (2 marks)
- The Chief Economist of Mountain Bank sees conflicting signals as to the future direction of interest rates. Mountain Bank would like to close the GAP to 0 (zero) and aims to use an interest rate swap. Outline a swap strategy. (3 marks)
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