The management of Green Bay 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, 2019 is attached to this project and presented in the accompanying Excel file.Also provided are the durations for the assets and liabilities. Other information you may need for your analysis is:

1) 10% of Fixed-rate mortgages mature within the next year.

2) 15% of Checkable deposits and 22% 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 4%.

Part B (2 pts.)

Scenario 1: Suppose you decide to insulate the bank by attracting and issuing fixed-rate 5-year CDs with a duration of 4.60 years and investing those funds in 90-day T-bills with a duration of 0.25 years.

a.What is the dollar amount of CD's/T-bills that you must issue/buy to bring ISGAP = 0? (0.3 pt.)

b.Show the new balance sheet. (0.3 pt.)

c.Now, what is your DGAP of capital? (0.2 pt.)

d. Explain the pros and cons of this bank's action.(0.2 pt.)

Scenario 2: 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 loans with a duration of 0.50 years.

a. What is the duration of the long-term debt that you must issue to bring DGAPK = 0? (0.3 pt.)

b. Show the new balance sheet. (0.3 pt.)

c. Now, what is your ISGAP? (0.2 pt.)

d. Explain the pros and cons of this bank's action.(0.2 pt.)

Green Bay State Bank

Balance Sheet at December 31, 2019

Amount

Duration

($ millions)

(years)

Assets

Cash and Cash items

$8.00 0.00

Reserves at Fed

3.00 0.00

Securities:

Less than 1 year

41.00 0.40

1 - 2 years

3.00 1.60

Greater than 2 years

8.00 4.16

Residential mortgages:

Variable-rate

30.00 0.40

Fixed-rate (30 years)

15.00 10.30

Commercial loans:

Less than 1 year

50.00 0.90

1 - 2 years

33.00 1.80

Greater than 2 years

25.00 15.00

Building and Equipment

10.00 0.00

Other Assets

1.00 0.00

Total Assets

$227.00

Amount

Duration

($ millions)

(years)

Liabilities

Checkable deposits

$9.00 1.00

Money market demand accounts

8.00 0.80

Savings deposits

20.00 1.00

Certificates of deposit:

Variable-rate

56.00 0.90

Less than 1 year

21.00 0.30

1 - 2 years

13.00 1.80

Greater than 2 years

4.00 8.00

Fed funds borrowed

15.00 0.01

Borrowings:

Less than 1 year

40.00 0.40

1 - 2 years

9.00 1.20

Greater than 2 years

26.00 12.00

Other liabilities

1.00 0.00

Total Liabilities

$222.00

Equity Capital

$5.00

Total Liabilities and Equity

$227.00