The management of Ark City State Bank has asked you to examine the interest rate risk of the bank. Management is concerned that interest rates will increase by the end of the year and wants to see what would happen to the relative profitability of the bank if the increase actually occurs.

The Balance Sheet at December 31, 2XX8 is presented in the accompanying Excel file. Also provided are the Modified durations for the assets and liabilities. Other information you may need for your analysis is:

1) 8% of Fixed-rate mortgages mature within the next year.

2) 10% of Checkable deposits and 20% of Savings deposits are rate sensitive.

3) Reserves at the Fed DO earn interest and are considered a rate sensitive asset.

4) Current market rates are 5%.

5) Round solutions to three decimal places.

Requirement: Use EXCEL to complete the following assignment. you have to input the formulas. Carry all computations and answers out to 3 decimal places. To prepare your presentation for the bank officers, you anticipate and answer the following questions: 1. What is the total for interest-rate-sensitive assets for the bank? (2.5 pts.) 2. What is the total for interest-rate-sensitive liabilities for the bank? (3.5 pts.) 3. What is the ISGAP of the bank? (0.5 pts.) 4. If interest rates increase by 1.5%, what will be the estimated change in net interest income for the bank? (1 pt.) 5. What is the weighted average duration of total assets for the bank? (6 pts.) 6. What is the weighted average duration of total liabilities for the bank? (6 pts.) 7. What is the duration gap of capital for the bank? (1 pt.) 8. If interest rates increase by 1.5%, what will be the expected change in the market value of capital for the bank?

	Ark City State Bank
	Balance Sheet
	At December 31, 2XX8							Modified
				Amount				Duration				Wtd Avg
				($ millions)		ISA/ISL		(years)	% wgt			Duration
	Assets
	Cash and Cash items			$5.00				0.00
	Reserves at Fed			2.00				0.00
	Securities:
	Less than 1 year			35.00				0.40
	1 - 2 years			3.00				1.60
	Greater than 2 years			7.00				4.16
	Residential mortgages:
	Variable-rate			25.00				0.40
	Fixed-rate (30 years)			10.00				10.30
	Commercial loans:
	Less than 1 year			45.00				0.90
	1 - 2 years			33.00				1.80
	Greater than 2 years			25.00				15.00
	Building and Equipment			9.00				0.00
	Other Assets			1.00				0.00
1.)	Total Assets			$200.00	ISA =		million			5.)	DA =		years
								Macaulay
				Amount				Duration				Wtd Avg
				($ millions)		ISA/ISL		(years)	% wgt			Duration
	Liabilities
	Checkable deposits			$5.00				1.00
	Money market demand accounts			5.00				0.80
	Savings deposits			18.00				1.00
	Certificates of deposit:
	Variable-rate			50.00				0.90
	Less than 1 year			19.00				0.30
	1 - 2 years			13.00				1.80
	Greater than 2 years			4.00				8.00
	Fed funds borrowed			13.00				0.01
	Borrowings:
	Less than 1 year			32.00				0.40
	1 - 2 years			9.00				1.20
	Greater than 2 years			26.00				12.00
	Other liabilities			1.00				0.00
2.)	Total Liabilities			$195.00	ISL =		million			6.)	DL =		years
	Equity Capital			$5.00				7.)	DGAPK=DA - (L/A x DL) =				years
	Total Liabilities and Equity			$200.00
3.)					ISGAP =		million	8.)	$NW=
									-DGAP x (i/1+i) x TA =				million
4.)	E(i)=			$NII = ISGAP x i=			million
	i0 =