Computing and Interpreting Cumulative GAP and Duration GAP Analysis: Complete the following multi-part problem.

A balance sheet analysis for each account of the Missouri Independence Bank is shown in the following table. The data on average maturities and durations are provided in the notes. Use this information to answer the following two questions.

The Missouri Independence Bank

Balance Sheet (in millions)

Assets Liabilities and Net Worth

Short-term securities [6%; note (a)] $110 Short-term Deposits [4%; note (d)] $380

Adjustable Rate Loans [7%; note (b)] $100 Floating Rate Funds [5%; note (e)] $200

Fixed Rate Loans [9%; note (c)] $650 Fixed Rate Funds [8%; note (f)] $280

Nonearning Assets $ 80 Net Worth $ 80

Total Assets $940 Total Liabilites & Net Worth $940

Notes: (a) maturity = 3 months; duration = 2.7 months

(b) maturity =12 months; duration = 11 months

(c) maturity = 8 years; duration = 6.5 years

(d) maturity = 1 month; duration = .9 months

(e) maturity = 3 months; duration = 2.7 months

(f) maturity = 3 years; duration = 2 years

(i) Interest Sensitive Gap Analysis. Use the above information to answer the following:

(a) Calculate the following gaps: 1 month, 1-6 months, 6 - 12 months, and 1 - 5 years.

Also calculate the cumulative gaps for 1 month, 6 months, 12 months, and 5 years.

Use the class example as a guide.

(b) Briefly comment on the banks gap management over this period. What type of interest rate trends would most negatively impact the bank?

(c) What is the net interest income (NII) for this bank?

(d) Using the one year cumulative gap, what is the change in NII from a percentage increase in interest rates of 1 percent?

(ii) Duration Gap Analysis. Assume interest rates are currently 4 percent.

Use the above information to answer the following questions.

(a) Calculate the leverage adjusted duration gap.

(b) Compute the change in net worth if interest rates decreased 50 basis points?

(c) Describe what steps the bank can take to protect itself from the change in interest rates mentioned in part (b)