Refer to the projected balance sheet of a bank shown below (numbers are in millions): Projected...

 

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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.

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