The managers of Grand Bank asks for a performance/risk analysis, and asks you to answer the following questions.

Grand Banks balance sheet is as follows:

Assets: Ave. Duration

Securities 3% rate $20 million 1 year

Long-term Loans 7% rate $ 120 million 6 years

Total Assets $ 140 million

Liabilities & Equity

Short-term Deposits 1% rate $ 100 million 1 year

Certificates of Deposit 2% rate 26 million 2 year

Total Liabilities $126 million

Equity 14 million

Total Liab.& Equity $140 million

a. 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 % ______________

b. If the bank has the NIM % that you calculated above, a PLL% of 1.20%, and a Burden % of 2.50%, 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 ______________

c. Using this equity multiplier, what is the banks Operating ROE?

(hint ROE = OROA x EM) Operating ROE _______________

e. 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 ____________

e. 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 _______________

e. 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 _____________

f. 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 7% as the average loan rate).

Expected % Chg in the Value of the Banks Equity ___________