3. After some time, the bank from Question 1 was acquired by another bank and transformed...
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3. After some time, the bank from Question 1 was acquired by another bank and transformed into a digital banking subsidiary, keeping its brand name but without any premises. Its updated bank balance sheet in the first year of business operations (following the restructuring) is presented below. Assets (in 5 millions) Cash Government securities Floating-rate loans 5-year, fixed-rate mortgages Total 10 150 90 40 290 Liabilities/ Equity (in $ millions) 2-year time deposits CDs Other borrowings Equity capital Total 165 12 80 33 290 The fixed-rate mortgages on the balance sheet are with maturity T-5 years, par (face) value of $40, and 14% interest (annual). Any principals are paid fully at maturity T. The time deposits are with maturity T-2 years, par (face) value of $165, and earn 6% per annum to deposit holders. a) Estimate the duration of the 5-year mortgage portfolio. b) Estimate the duration of the 2-year time deposits. c) Estimate the duration of the bank's assets if the following information is also available: duration of Government Securities and Floating-rate loans (each) is 0.85. d) Estimate the duration of the bank's liabilities if the following information is also available: duration of CDs and Other borrowings (each) is 0.35. e) Estimate the bank's (leveraged adjusted) duration gap. Explain whether the bank has any interest rate risk exposure and discuss a possible method of immunization (if needed). 3. After some time, the bank from Question 1 was acquired by another bank and transformed into a digital banking subsidiary, keeping its brand name but without any premises. Its updated bank balance sheet in the first year of business operations (following the restructuring) is presented below. Assets (in 5 millions) Cash Government securities Floating-rate loans 5-year, fixed-rate mortgages Total 10 150 90 40 290 Liabilities/ Equity (in $ millions) 2-year time deposits CDs Other borrowings Equity capital Total 165 12 80 33 290 The fixed-rate mortgages on the balance sheet are with maturity T-5 years, par (face) value of $40, and 14% interest (annual). Any principals are paid fully at maturity T. The time deposits are with maturity T-2 years, par (face) value of $165, and earn 6% per annum to deposit holders. a) Estimate the duration of the 5-year mortgage portfolio. b) Estimate the duration of the 2-year time deposits. c) Estimate the duration of the bank's assets if the following information is also available: duration of Government Securities and Floating-rate loans (each) is 0.85. d) Estimate the duration of the bank's liabilities if the following information is also available: duration of CDs and Other borrowings (each) is 0.35. e) Estimate the bank's (leveraged adjusted) duration gap. Explain whether the bank has any interest rate risk exposure and discuss a possible method of immunization (if needed).
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Answer rating: 100% (QA)
a The duration of the 5year mortgage portfolio is 467 years Duration 1114 111421141 1114311411141 11... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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