Refer to the projected balance sheet of a bank shown below (numbers are in millions): Projected...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Refer to the projected balance sheet of a bank shown below (numbers are in millions): Projected Balance Sheet Liabilities Demand deposits rate Assets Consumer loans -10% floating rate 375 Corporate loans -14% floating rate 825 Mortgage loans-12% fixed rate 1253 Other assets 87 Total assets 2540 - 2% floating 289 - Term deposits -5% floating rate 10-year bonds - 8% fixed rate Equity Total liabilities and equity - 1530 326 - The projected balance sheet is prepared on January 1, 2019 and projected items belong to the end of the first quarter. 200 The bank uses short-term liquidity management policy where liquidity gaps are funded for only one quarter ahead. - The three-month and six-month LIBOR rate as of today are 5.75% and 6%, respectively. Assume that FRAs are fairly priced. The bank can borrow at 8% fixed rate or LIBOR+0.20. Another bank in the industry can borrow at 10% fixed rate or LIBOR+0.80. 2345 - The book value and market value of assets and liabilities are equal. The duration of fixed-rate assets is 11 years while the duration of fixed-rate liabilities is 6.5 years. Based on the information provided above answer the THREE following questions: Q1) Provide a detailed analysis of the bank's liquidity and interest rate risk profile. (Your analysis should include measurement of both types of risks and explanation of the bank's exposure if either or both risks are not managed). Q2) Calculate the expected change in the Net Interest Income of the bank after funding the liquidity gap if interest rates are expected to increase by 2%. (Include the impact on both interest income and interest expense). Q3) Calculate the sensitivity of the economic value of the bank based on the fixed rate assets and liabilities and explain how it relates to the duration gap between assets and liabilities. Refer to the projected balance sheet of a bank shown below (numbers are in millions): Projected Balance Sheet Liabilities Demand deposits rate Assets Consumer loans -10% floating rate 375 Corporate loans -14% floating rate 825 Mortgage loans-12% fixed rate 1253 Other assets 87 Total assets 2540 - 2% floating 289 - Term deposits -5% floating rate 10-year bonds - 8% fixed rate Equity Total liabilities and equity - 1530 326 - The projected balance sheet is prepared on January 1, 2019 and projected items belong to the end of the first quarter. 200 The bank uses short-term liquidity management policy where liquidity gaps are funded for only one quarter ahead. - The three-month and six-month LIBOR rate as of today are 5.75% and 6%, respectively. Assume that FRAs are fairly priced. The bank can borrow at 8% fixed rate or LIBOR+0.20. Another bank in the industry can borrow at 10% fixed rate or LIBOR+0.80. 2345 - The book value and market value of assets and liabilities are equal. The duration of fixed-rate assets is 11 years while the duration of fixed-rate liabilities is 6.5 years. Based on the information provided above answer the THREE following questions: Q1) Provide a detailed analysis of the bank's liquidity and interest rate risk profile. (Your analysis should include measurement of both types of risks and explanation of the bank's exposure if either or both risks are not managed). Q2) Calculate the expected change in the Net Interest Income of the bank after funding the liquidity gap if interest rates are expected to increase by 2%. (Include the impact on both interest income and interest expense). Q3) Calculate the sensitivity of the economic value of the bank based on the fixed rate assets and liabilities and explain how it relates to the duration gap between assets and liabilities.
Expert Answer:
Answer rating: 100% (QA)
Q1 The banks liquidity risk is low as it has a large amount of liquid assets relative to its liabilities However the bank is exposed to interest rate risk as a rise in interest rates would increase th... View the full answer
Related Book For
Financial reporting, financial statement analysis and valuation a strategic perspective
ISBN: 978-0324789416
7th Edition
Authors: James M Wahlen, Stephen P Baginskl, Mark T Bradshaw
Posted Date:
Students also viewed these accounting questions
-
The following items appear on the balance sheet of a company with a two-month operating cycle. Identify the proper classification of each item as follows: C if it is a current liability, L if it is a...
-
The following is the balance sheet of a DI (in millions): The asset-liability management committee has estimated that the loans, whose average interest rate is 6 percent and whose average life is...
-
Refer to the projected financial statements for Massachusetts Stove Company (MSC) prepared for Case 10.2. The management of MSC wants to know the equity valuation implications of not adding gas...
-
In terms of the dielectric constant K, what happens to the electric flux through the Gaussian surface shown in Fig. 24.22 when the dielectric is inserted into the previously empty space between the...
-
Consider the reaction Fe2O3(s) + 3H2(g) 2Fe(s) + 3H2O(g) Assuming Ho and So do not depend on temperature, calculate the temperature where K = 1.00 for this reaction.
-
To help familiarize you with the financial reporting of a real company in order to further your understanding of the chapter material you are learning. This case addresses the long-term assets of...
-
The CEO of Evans \& Sons, Inc., was considering a lease for a new administrative headquarters building. The building was old, but was very well located near the company's principal customers. The...
-
You have prepared the following schedule for a project in which the key resources is a tractor. There are three tractors available to the project. Activities A and D require one tractor to complete...
-
Homework 4: Linear programming modeling & solution (An investment problem) A client has approached a stockbroker with the following request: invest $100,000 for maximum annual income under the three...
-
The demand for fishing poles is at its minimum during the month of December and reaches its maximum during the month of April. Fishing Hole, Inc., estimates the December demand at 50 poles. It...
-
What happens if the conditions for the price system are not met? what is a negativity externality? one example what is a positive externality? one example why are public goods considered to be a...
-
A simplified model can be applied to describe the steady-state temperature distribution through the core region, muscle region and skin region of the human body. The core region temperature...
-
Consider a person standing in a room, which is at a temperature of \(21^{\circ} \mathrm{C}\). Determine the total heat rate from this person if the exposed surface area of the person is \(1.6...
-
Consider a \(0.6 \mathrm{~m}\) high and \(2 \mathrm{~m}\) wide double-pane window consisting of two \(4 \mathrm{~mm}\) thick layers of glass \(\left(k=0.80 \mathrm{~W} / \mathrm{m}^{\circ} \mathrm{C}...
-
May an AICPA member serve as an attorney for an audit client? Explain.
-
Identify at least four examples of situations in which an AICPA member would not be deemed independent.
-
The mean weight of male nurses working at a local hospital is at least 170 lbs. Express the null and alternative hypotheses in symbolic form for this claim. H0:0: H1:1:
-
Dan and Diana file a joint return. Dan earned $31,000 during the year before losing his job. Diana received Social Security benefits of $5,000. a. Determine the taxable portion of the Social Security...
-
Identify three economic factors that will drive a firms value-to-book ratio to decrease over time. Identify three accounting factors that will drive a firms value-to-book ratio to decrease over time.
-
The acquisition of equipment by assuming a mortgage is a transaction that firms cannot report in their statement of cash flows but must report in a supplemental schedule or note. Of what value is...
-
The financial statements of ABC Corporation, a retail chain, reveal the information for income taxes shown in Exhibit 2.13. Required a. Assuming that ABC had no significant permanent differences...
-
Billy Tushoes recently received an offer to join the accounting firm of Tick and Check LLP. Billy would prefer to work for Foot and Balance LLP but has not received an offer from the firm the day...
-
Telecommunications, Inc., is a U.S. company, a global leader in information technology, and it specializes in building data network systems. The company is a major player in the industry, although it...
-
At the 2009 U.S. Tennis Open, a line judge called a foot fault against Serena Williams, causing her to lose a point at a critical juncture of her championship match against the ultimate winner, Kim...
Study smarter with the SolutionInn App