Consider the following simplified example of a commercial bank, which is borrowing and lending funds of two maturities: short-term (1 year) and long-term (2 years), all zero-coupon. Loans consist of $40 million short term and $40 million long term, while liabilities are $60 million short term and $10 million long term. All numbers are in market value terms as of October 30, 2012. Hence, the bank’s balance sheet is the yield curve as of October 30, 2012, is a flat solid line; Annual yields on assets and liabilities of all maturities are 10%. Now suppose that on October 31, 2012, the yield curve shifts parallel such that all yields rise to 12%.

 

A) What is the new balance sheet of the bank?

B) What is the impact of a parallel shift in the yield curve to the economic value of the bank?

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Assets Liabilities Short term loans 40,000,000 Short term liabilities 60,000,000 Long term loans 40,000,000 Long term liabilities 10,000,000 Total liabilities 70,000,000 Equity 10,000,000 Total loans 80,000,000 Total equity and liabilities 80,000,000 Assets Liabilities Short term loans 40,000,000 Short term liabilities 60,000,000 Long term loans 40,000,000 Long term liabilities 10,000,000 Total liabilities 70,000,000 Equity 10,000,000 Total loans 80,000,000 Total equity and liabilities 80,000,000

Answer rating: 100% (QA)

A The balance will still be the same since all numbers are in market value as of October 30 ... View the full answer