You are asked to determine the market value (mark to market) balance sheet for Blackburn State Bank and loan duration (amounts in $ thousands and duration in years) Book Value Market Value Assets Amount Amount Duration T bills $ 360 $ 360 0 50 Loans 10,000 Total Assets 10,360 Liabilities Deposits 8,368 8,368 0 50 Total Liabilities 8,368 8,368 Equity 1,992 Total Lia and NW 10,360 Since this is a simple bank, it has only one type of loan The loan has a $10,000 book value (current outstanding principal), amortized loan with annual payments , an interest rate of 6 5 percent, and 20 years to maturity Similar amortized loans today ( market interest rate for similar loans ) have an interest rate of 7 percent which, is the market yield Using Excel, determine the market value and duration of the loan and fill in the blanks in the balance sheet above Please include a copy of your Excel Spreadsheet with your completed exam (you can copy and paste as a picture) What is the average duration of all the assets and what is the average duration of all the liabilities Average Duration of Assets Average Duration of Liabilities c What is the leverage adjusted duration gap Is Angus State Bank exposed to interest rate risk Is it exposed if interest rate increase or decrease Leverage adjusted duration gap (DG) DA kDL d What is the forecasted impact on the market value of equity caused by a relative 1 5 percent upward shift in the entire yield curve i e , Dr (1 r) 0 0150 The market value of the equity will change by the following MVE DG (A) r (1 r) e What variables are available to the financial institution to immunize or at least reduce interest rate risk exposure on the balance sheet Taking one variable at a time, how much would each variable need to change to get DGAP equal to 0 To immunize the institution for interest rate risk, the Leverage Adjusted DG needs to be zero Hint DG D A kD L 0

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You are asked to determine the market value (mark-to-market) balance sheet for Blackburn State Bank and loan duration (amounts in $ thousands and duration in

You are asked to determine the market value (mark-to-market) balance sheet for Blackburn State Bank and loan duration (amounts in $ thousands and duration in years):

Book Value Market Value

Assets Amount Amount Duration

T-bills $ 360 $ 360 0.50

Loans* 10,000 _______ ______

Total Assets 10,360 _______

Liabilities

Deposits 8,368 8,368 0.50

Total Liabilities 8,368 8,368

Equity 1,992 _______

Total Lia and NW 10,360 _______

*Since this is a simple bank, it has only one type of loan. The loan has a $10,000 book value (current outstanding principal), “ amortized” loan with annual payments , an interest rate of 6.5 percent, and 20-years to maturity. Similar amortized loans today ( market interest rate for similar loans ) have an interest rate of 7 percent which, is the market yield .

Using Excel, determine the market value and duration of the loan and fill in the blanks in the balance sheet above. Please include a copy of your Excel Spreadsheet with your completed exam (you can copy and paste as a picture).

What is the average duration of all the assets and what is the average duration of all the liabilities?

Average Duration of Assets:

Average Duration of Liabilities:

c. What is the leverage-adjusted duration gap? Is Angus State Bank exposed to interest rate risk? Is it exposed if interest rate increase or decrease ?

Leverage-adjusted duration gap (DG) = DA – kDL=___________?

d. What is the forecasted impact on the market value of equity caused by a relative 1.5 percent upward shift in the entire yield curve? [i.e., Dr/(1+r) = 0.0150]?

The market value of the equity will change by the following:

MVE = -DG * (A) * r/(1 + r) =______________?

e. What variables are available to the financial institution to immunize or at least reduce interest rate risk exposure on the balance sheet? Taking one variable at a time, how much would each variable need to change to get DGAP equal to 0?

To immunize the institution for interest rate risk, the Leverage Adjusted DG needs to be zero:

Hint: DG = D _A –kD _L = 0