Question 2

50 Points

Suppose that ABC bank and DEF bank have the following assets and liabilities:

ABC bank

Assets

$200 million five-year floating-rate bonds (Libor + 7%) (Interest rate is adjusted annually)

Liabilities

$200 million five-year fixed-rate CDs (9%)

DEF bank

Assets

$200 million five-year fixed-rate loans (16%)

Liabilities

$200 million five-year floating-rate CDs (Libor + 5%) (Interest rate is adjusted annually)

Required:

a. What is the risk exposure of ABC bank? (5 marks)

b. What is the risk exposure of DEF bank? (5 marks)