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Question 2 The management of ABC Bank Limited is worried about falling interest rates over the next 1 year and its impact on the bank's
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The management of ABC Bank Limited is worried about falling interest rates over the next
year and its impact on the bank's Net Interest Income, returns on loans and capital. During
ALCO last month, the treasurer of ABC Bank Ltd was tasked to quantify the risks the bank is
exposed to over the next year. The Treasurer has gathered an extract of the bank's balance
sheet as at June as shown below:
In addition to the balance sheet, the Treasurer has determined that the weighted average
duration of the bank's assets is years whilst that of its deposits is years. The current year
interest rates is and is forecasted to decline to in a year's time. Also, of the
short term loans reprice every months, whilst of the Long Term consumer loans reprice
every months. The Long Term Commercial loan is fixed whilst the mortgage reprice
every month.
On the deposit side, of both the demand and the savings account reprice every month. As
a new recruits in the Treasury department, the Treasurer has tasked you to help determine the
following:
a The impact on bank's Net Interest Income over the next lyr if the decline in rates as
forecasted tends to be true.
b The impact on bank's Capital Net worth
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