Part II: Short Questions (70%) 1. City Bank has the following market value balance sheet (in millions, all interest at annual rates). All securities are selling at par equal to book value. All instruments pay interest annually and the principles are returned at maturity. The current interest rate of floating-rate mortgages is 7%. Value Duration $200 0 120 ? 200 ? Balance Sheet (in thousand dollars) Assets Value Duration Liabilities and Equity Cash $300 Demand deposits 1-year consumer loans at 50 1 1-year CDs at 3% interest 6% interest 2-year consumer loans at 70 1.93 5-year CDs at 4% interest 7% interest 10-year commercial loan at 150 6.76 20-year debentures at 6% 10% interest interest 10-year Floating-rate 200 0.33 mortgages (rate adjusted every 9 months) 30-year mortgages at 8% 300 12.16 Equity interest 200 12.16 80 Total assets $800 Total liabilities and equity $800 Income Statement Interest Income Interest expense Provision for loan losses Noninterest income Noninterest expense Taxes $26,000 12,000 1,400 1,600 5,300 1,000 a. Calculate the spread and provision for loan loss ratio of City Bank? Briefly explain these indicators. Hints: the spread is related to earning assets and costing liabilities, the provision for loan loss ratio b. c. e. is related to income. (6 marks) If the interest rate increased by 1.2%, what will be the impact on the net interest income in 1 year? (4 marks) What is the maturity gap for City Bank? (4 marks) d. According to duration model, if interest rate is increased by 1%, what is the estimated market value of 10-year floating rate mortgages? (4 marks) What will be the maturity gap if the interest rates in all assets and liabilities are increased by 1 percent? (9 marks) Please calculate the unknown duration in the above table. (8 marks) What is the impact on the market value of equity if the relative change in all interest rates is an increase of 1 percent? (4 marks) Please stated the weaknesses of repricing model and the maturity model. How does duration model fix the weaknesses? (7 marks) f. g h. Part II: Short Questions (70%) 1. City Bank has the following market value balance sheet (in millions, all interest at annual rates). All securities are selling at par equal to book value. All instruments pay interest annually and the principles are returned at maturity. The current interest rate of floating-rate mortgages is 7%. Value Duration $200 0 120 ? 200 ? Balance Sheet (in thousand dollars) Assets Value Duration Liabilities and Equity Cash $300 Demand deposits 1-year consumer loans at 50 1 1-year CDs at 3% interest 6% interest 2-year consumer loans at 70 1.93 5-year CDs at 4% interest 7% interest 10-year commercial loan at 150 6.76 20-year debentures at 6% 10% interest interest 10-year Floating-rate 200 0.33 mortgages (rate adjusted every 9 months) 30-year mortgages at 8% 300 12.16 Equity interest 200 12.16 80 Total assets $800 Total liabilities and equity $800 Income Statement Interest Income Interest expense Provision for loan losses Noninterest income Noninterest expense Taxes $26,000 12,000 1,400 1,600 5,300 1,000 a. Calculate the spread and provision for loan loss ratio of City Bank? Briefly explain these indicators. Hints: the spread is related to earning assets and costing liabilities, the provision for loan loss ratio b. c. e. is related to income. (6 marks) If the interest rate increased by 1.2%, what will be the impact on the net interest income in 1 year? (4 marks) What is the maturity gap for City Bank? (4 marks) d. According to duration model, if interest rate is increased by 1%, what is the estimated market value of 10-year floating rate mortgages? (4 marks) What will be the maturity gap if the interest rates in all assets and liabilities are increased by 1 percent? (9 marks) Please calculate the unknown duration in the above table. (8 marks) What is the impact on the market value of equity if the relative change in all interest rates is an increase of 1 percent? (4 marks) Please stated the weaknesses of repricing model and the maturity model. How does duration model fix the weaknesses? (7 marks) f. g h