Question 1 The concept of duration is critical for the management of interest amongst banks. Your bank has is long on the Government of Ghana Bonds that pay annual coupons with the following details: Face Value: Tenor (Term to maturity): Opportunity Cost (YTM): Coupon Rate: Estimate the Macaulay duration for this bond Question 2 Consider a bank with the following characteristics: Ghc500 millions of assets Ghc400 million of liabilities Ghc100 million of own equity Ghc 1,000,000 4 years 20.0% 22.0% The duration of assets is five years The duration of liabilities is three years Lets suppose that bank management expect an interest rate increase of 0.25 percent to 4.5 per cent following the next meeting of the Bank of Ghanas Monetary Policy Committee (MPC). Estimate the effect of the change in interest rate on the value of the banks equity.( 10 Marks) 1 (5 marks)

Question 3 The following information relates to the duration of assets and liabilities of Strong Trust Bank Limited. This asset and liability position was as the rates on the market was 28 percent. Assets Amount Reserves 45,000 Macaulay's Duration 0 0 1.8 years 1.5 years 3.3 years 4 years 1.0 years 3.3 years 0 0 8.3 years Cash Bonds Commercial Loans Total Assets Liabilities & Equity Small time deposits Large CDs Transactions accounts Bank of Ghana Funds Equity Liabilities & Equity 23,000 102,000 375,000 545,000 130,000 70,000 250,000 45,000 50,000 545,000 i. Estimate the change in net worth of Strong Trust Bank Limited if market interest rates increase to 34 percent. (10 Marks) ii. Recommend any two specific strategies that Strong Bank Limited could implement to immunize its interest rate risk. (5 Marks) Question 3. Consider the following bank balance sheet and associated average interest rates. The time frame for rate sensitivity is one year. Figures are in thousands. Assets Amount $ Rate Liabilities & Equity Rate sensitive Fixed rate Nonpaying liabilities & Equity Amount $ 91,600 181,850 18,750 292,200 Rate 0.80% 2.10% Rate sensitive Fixed rate Nonearning 27,500 Total 292,200 103,300 3.30% 161,400 4.50% Required a. Calculate the banks GAP, expected NII, and NIM if interest rates and portfolio composition remain constant during the year. This bank is positioned to profit if interest rates move in which direction? b. Calculate the change in expected NII and NIM if the entire yield curve shifts 2 percent higher during the year. Is this outcome consistent with the banks static GAP? c. Suppose that, instead of the parallel shift in the yield curve in Part b, interest rates increase unevenly. Specifically, suppose that asset yields rise by 0.50 percent while liability rates rise by 0.75 percent. Calculate the change in NII and NIM. Is this uneven shift in rates more or less likely than a parallel shift? d. Suppose the bank converts $20,000 of RSLs to fixed-rate liabilities during the year and interest rates remain constant. What would the banks NII equal compared with the amount initially expected? Explain why there is a difference. (20 Marks) 2