Suppose you decide to immunize the bank by issuing long-term debt of $30 million with a duration of X years and using those funds to make variable-rate residential mortgage loans with a duration of 0.50 years.
- What is the duration of the long-term debt that you must issue to bring DGAPK = 0? (0.2 pt.)
- Show the new balance sheet. (0.2 pt.)
- Now, what is your ISGAP? (0.2 pt.)
Explain the pros and cons of this banks action.
Amount Duration (5 millions) (years) Wtd Avg Duration % wgt ISL $9.00 8.00 20.00 1.00 0.80 1.00 4.054% 3.604% 9.009% 0.041 0.029 0.090 9 8.00 20 50.00 21.00 Liabilities Checkable deposits Money market demand accounts Savings deposits Certificates of deposit: Variable-rate Less than 1 year 1 - 2 years Greater than 2 years Fed funds borrowed Borrowings: Less than 1 year 1 - 2 years Greater than 2 years Other liabilities Total Liabilities 50.00 21.00 13.00 4.00 15.00 0.90 0.30 1.80 8.00 0.01 22.523% 9.459% % 5.856% 1.802% 6.757% 0.203 0.028 0.105 0.144 0.001 40.00 40.00 9.00 32.00 1.00 $222.00 0.40 1.20 12.00 0.00 18.018% 4.054% 14.414% 0.450% 100.000% 0.072 0.049 1.730 0.000 2.491 $148.00 Equity Capital Total Liabilities and Equity $5.00 $227.00 Interest Sensitive Assets Securties less than 1 year Variable rate residential mortgages 10% Fixed rate Residential mortgages Commerical loans less than 1 year Total Interest sensitve assets 41.00 30.00 1.50 50.00 122.50 Interest Sensitive Liabilities 15% checkable deposits 1.35 Money market demand accounts 8.00 22% savings deposits 4.40 Variable rate certificates of deposits 50.00 Certificates of deposits less than 1 year 21.00 Fed funds borrowed 15.00 Borrowing less than 1 year 40.00 Total Interest sensitive liabilities 139.75 ISGAP -17.25 Amount Duration (5 millions) (years) Wtd Avg Duration % wgt ISL $9.00 8.00 20.00 1.00 0.80 1.00 4.054% 3.604% 9.009% 0.041 0.029 0.090 9 8.00 20 50.00 21.00 Liabilities Checkable deposits Money market demand accounts Savings deposits Certificates of deposit: Variable-rate Less than 1 year 1 - 2 years Greater than 2 years Fed funds borrowed Borrowings: Less than 1 year 1 - 2 years Greater than 2 years Other liabilities Total Liabilities 50.00 21.00 13.00 4.00 15.00 0.90 0.30 1.80 8.00 0.01 22.523% 9.459% % 5.856% 1.802% 6.757% 0.203 0.028 0.105 0.144 0.001 40.00 40.00 9.00 32.00 1.00 $222.00 0.40 1.20 12.00 0.00 18.018% 4.054% 14.414% 0.450% 100.000% 0.072 0.049 1.730 0.000 2.491 $148.00 Equity Capital Total Liabilities and Equity $5.00 $227.00 Interest Sensitive Assets Securties less than 1 year Variable rate residential mortgages 10% Fixed rate Residential mortgages Commerical loans less than 1 year Total Interest sensitve assets 41.00 30.00 1.50 50.00 122.50 Interest Sensitive Liabilities 15% checkable deposits 1.35 Money market demand accounts 8.00 22% savings deposits 4.40 Variable rate certificates of deposits 50.00 Certificates of deposits less than 1 year 21.00 Fed funds borrowed 15.00 Borrowing less than 1 year 40.00 Total Interest sensitive liabilities 139.75 ISGAP -17.25
