Question
The Homestead Bank has the following questions it would like to ask you about its bank. The banks balance sheet is as follows : Assets:
The Homestead Bank has the following questions it would like to ask you about its bank. The banks balance sheet is as follows:
Assets: Ave. Duration
Treasury Bills 1.2% rate $ 300 million 1 year
Long-term Loans 6% rate $ 500 million 6 years
Total Assets $ 800 million
Liabilities & Equity
Short-term Deposits 1% rate $400 million 1 year
Certificates of Deposit 3% rate 200 million 3 year
Total Liabilities $600 million
Equity 200 million
Total Liab.& Equity $800 million
What is the banks expected net interest income $ (NII) and expected net interest margin (NIM)? [Hint: NII = Sum (Each asset x its rate) Sum (Each liability x its rate)]
and NIM = NII / Earning Total Assets (excludes cash)
NII ($s) ____________ NIM % ______________
If the bank has the NIM % that you calculated above, a PLL% of 0.50%, and a Burden % of 1.00%, what is the banks operating ROA before taxes (NIM Burden% - PLL%)? Operating ROA (OROA) _______________
c. What is the equity multiplier (EM) for the bank? (hint EM = total assets/equity)
EM ______________
d. Using this equity multiplier, what is the banks Operating ROE?
(hint ROE = OROA x EM) Operating ROE _______________
What is the banks 1-year income (funding) gap (Rate Sensitive Assets (RSA) for 1 year Rate Sensitive Liabilities (RSL) for 1 year? Funding Gap ____________
f. Given this funding gap if rates go up by 1%, what is the expected change in the banks NII $? [Hint: Change NII $ = Funding Gap x Change Rate]
Expected Change in NII _______________
g. What is the Banks Duration gap (D-Gap)?
D-GAP = Duration of Assets {[Total Liabs./Total Assets] x Duration Liabs.}
Hint: Duration of Assets = Sum {[Each type of asset / Total Assets] x its Duration}
Duration of Liabilities = Sum {[Each type of Liability / Total Liabs.] x its Duration}
Duration of Assets __________
Duration of Liabilities ______________ Duration Gap _____________
h. What is the expected % change in the value of equity with a rise in rates of 1%? Expected Change in Value of Equity = - D-GAP x {[(Chg rate / (1+ Ave loan rate)] ***(Use 6% as the average loan rate).
Expected % Chg in the Value of the Banks Equity ___________
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started