a. The balance sheet for Steadman Bank is as stated below. The Bank's manager calculates that...
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a. The balance sheet for Steadman Bank is as stated below. The Bank's manager calculates that the duration of its assets is 8 years and the duration for its liabilities is 6 years. Interest rates are currently at 5%. Assets Assets |Liabilities and Equity Liabilities Equity Total liabilitiles and equity $ 300 275 25 Total assets 300 300 i. The manager also learns from its research department that rates are expected to rise from 5 % to 6% in the immediate future. Determine the effect on equity holders' net worth if the forecast of rising interest rates proves to be true and show the composition of the balance sheet after the rate change. (5 marks) i. What two variables would you change to immunize the balance sheet of the Financial Institution? How much would each variable need to change to get the duration gap (DGAP) equal to zero? (5 marks) ii. What in your opinion, are the two most significant limitations faced by Financial Institution Managers when using the duration gap model to immunize the portfolio of a financial institution? (5 marks) a. The balance sheet for Steadman Bank is as stated below. The Bank's manager calculates that the duration of its assets is 8 years and the duration for its liabilities is 6 years. Interest rates are currently at 5%. Assets Assets |Liabilities and Equity Liabilities Equity Total liabilitiles and equity $ 300 275 25 Total assets 300 300 i. The manager also learns from its research department that rates are expected to rise from 5 % to 6% in the immediate future. Determine the effect on equity holders' net worth if the forecast of rising interest rates proves to be true and show the composition of the balance sheet after the rate change. (5 marks) i. What two variables would you change to immunize the balance sheet of the Financial Institution? How much would each variable need to change to get the duration gap (DGAP) equal to zero? (5 marks) ii. What in your opinion, are the two most significant limitations faced by Financial Institution Managers when using the duration gap model to immunize the portfolio of a financial institution? (5 marks)
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Fundamental Managerial Accounting Concepts
ISBN: 978-0078025655
7th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor-Yi Tsay, Philip Old
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