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1. Bank of RGV is a successful regional bank with common equity share outstanding 1 million. It pays $10 dividend each year and expected to grow 5% in period 1. The appropriate discount rate to reflect shareholder risk is 10%. Answer below question using below data pertains to Bank of RGV:

Below numbers are in 1000s.

Balance sheet Income statement

Cash $100 Interest income $400

Securities investments $600 interest expense ($150)

Net loans $1,200 Non-interest income $50

Net premises and equip. $300 Non-interest expenses ($100)

Total assets $2,200 Provision for loan losses ($60)

Deposits $1,100 Pretax net operating income $140

Non-deposit borrowings* $800 securities gains (loses) ($40)

Equity Capital $300 Taxes ($45)

Total liabilities $2,200 Net Income $55

*All purchased funds

a) What is the value of banks stock price? A. $200 per share

$150 per share

$300 per share

$250 per share

$175 per share

What is the banks ROA and ROE?

5% and 15%

7% and 19.5%

2.5% and 18.33%

10% and 5%

4% and 12.7%

What is the bank's asset utilization ratio?

5%

7%

2.5%

6.36%

12.7%

What is the bank's tax management?

39.28%

25.30%

42.55%

10%

4.8%

What is the banks Earning per share (EPS)?

5.5%

7.5%

2.5%

10%

4%

Bank of RGV currently has the following interest-sensitive assets and liabilities on its balance sheet with the interest-rate sensitivity weights noted.

Interest-Sensitive Assets	$ Amount	Rate Sensitivity Index
Federal fund loans	$75.00	1.00
Security holdings	$90.00	1.20
Loans and leases	$450.00	1.45
Interest-Sensitive Liabilities	$ Amount	Rate Sensitivity Index
Interest-bearing deposits	$325.00	0.75
Money-market borrowings	$80.00	0.95

What is the banks current interest-sensitive gap? Adjusting for these various interest rate sensitivity weights, what is the banks weighted interest-sensitive gap? a. $625 & $340

$200 & $500

$450 & $312

$500 & $350

$210 & $516

Suppose the federal funds interest rate change by 200 basis points (2%), how will the banks net interest income be affected given its current original and weighted balance sheet makeup?

increases by +4.2 and +10

decreases by -4.5 and -8

increases by +2.5 and decreases by -5

decreases by -2 and increases by +4

None is correct

After you determine either the interest-sensitive gap is positive or negative, you should be able to determine the risk and possible management response. Considering the direction of interest sensitive gap, what would be your strategy to minimize the risk?

Extend asset maturity or shorten liability maturity

Extend liability maturity or shorten asset maturity

Do nothing market and let it recover by itself

Decrease overall asset books

Decrease overall liability books

RGV banks cash flows from assets (loans) and liabilities (deposits) are as follows:

Expected Cash Inflows Expected Cash Outflows Annual Period in Which Cash Receipts

from Assets from Liabilities Are Expected

$1,275,600 $1,295,500 Current year

746,872 831,454 Two years from today

341,555 123,897 Three years from today

If the discount rate applicable to the previous cash flows is 5.5%, what is the duration of the bank assets (D_A) and liabilities (D_L)? a. D_A = 5.6; D_L = 1.5

D_A = 1.6; D_L = 1.5

D_A = 3.8; D_L = 4.5

D_A = 1.7; D_L = 2.5

D_A = 7.5; D_L = 1.85

What is the duration gap?

+2.50

-0.75

-1.80 d. +0.12

e. +0.60

If total assets are $15 billion and total liabilities are $10 billion, what is the leverage-adjusted duration gap? a. -2.50

+0.75

+1.80 d. -1.60

e. +0.60

If interest rates suddenly climb to 6%, what change will occur in the value of RGV banks net worth?

-5.2 Millions

-42,895

+5.2 Millions

+42,895

-1.5 Millions

By how much would RGV banks net worth change if, instead of rising, interest rates fall from 5.5% to 5%?

-1.2 Millions

-42,895

+1.2 Millions

-5.2 Million

+42,895

4. Bank of South Texas reports an average asset duration of 9 years and an average liability duration of 4 years. In its latest financial report, the bank recorded total assets of $220 million and total liabilities of $190 million. If interest rates began at 1% and then suddenly climbed to 1.5%, what change will occur in the value of Bank of South Texass net worth? By how much would Bank of South Texass net worth change if, instead of rising, interest rates fall from 1% to 0.75%?

NW decrease by -10.4 millions and NW increase by 5 millions

NW decrease by -7.10 millions and NW increase by 3.5 millions

NW decrease by -5.2 millions and NW increase by 1 millions

NW decrease by -6.04 millions and NW increase by 3.02 millions

NW decrease by -4 millions and NW increase by 2.5 millions

5. Suppose a Bank of Texas (BoT) has an average asset duration of 4 years, an average liability duration of two years, total assets of $500 million, and liabilities of $450 million at a given point in time. Suppose, too, that the firm plans to trade in Treasury bond futures contracts. The T-bonds named in the futures contracts have a duration of 10 years, and the T-bonds current price is $99,700 per $100,000 contract. How many futures contracts does a BoT need to cover a given size risk exposure? What is the change in net worth of BoT, if interest rate increases from 2% to 5%. As we notice that BoT have positive duration gap (indicating its assets have longer average maturity than its liabilities). What sort of hedging strategy should BoT adopt if interest rate declines?

Required Futures contracts are 1103, Change in NW 550 millions , long hedge

Required Futures contracts are 2005, Change in NW 700 millions , short hedge

Required Futures contracts are 1000, Change in NW 905 millions , long hedge

Required Futures contracts are 1553, Change in NW 100 millions , long hedge

Required Futures contracts are 1300, Change in NW 50 millions , short hedge

6. Suppose investors expect a Bank of RGV to pay a $5 dividend at end of period 1, $12 at the end of period 2, and then plan to sell the stock for a price of $120 per share at the end of period 2. If the risk-adjusted discount rate is 10%, the current value of the banks stock should be: a. 125

200

100

500

800