s.pdf w19as3sol.doc.pdf 49f233c38bee8583... Create account Login Balance Sheet for a Simplified Bank Assets Cash Gov. Securities...

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s.pdf w19as3sol.doc.pdf 49f233c38bee8583... Create account Login Balance Sheet for a Simplified Bank Assets Cash Gov. Securities $ 100,000.00 190,476.19 Fixed Rate Mortgage Loans 600,000.00 Fixed Rate Commercial Loans 300.000.00 Fixed Rate CDs Total Assets Total Assets Liabilities Demand Deposits Savings Accts. Insured CDs Equity $ 400,000.00 176,000.00 352,330.18 162.555.83 $1,090,886.01 99,590.17 $1,190,476.19 $1,190,476.19 Total Liabilities $1,190,476.19 Total Liabilities & Equity Information on Individual Assets (1) The Government Securities are discount securities with one year to maturity. The maturity value is $200,000, yielding an annual rate of 7.71%. (2) The Fixed Rate Mortgage Loans are amortized loans with 10 years to maturity. The annual payment for the loans is $88,251.58 which is paid at the end of each year. The annual rate for the loans are 5%. (3) The Fixed Rate Commercial Loans are structured to pay interest only each year, and a maturity value of $300,000. The maturity is 3 years. The annual interest rate is 8.71%. All assets are issued at current market rates, so the values on the current balance sheet are market values. Information on Individual Liabilities (1) Demand Deposits and Savings Accounts have no maturity. (2) Insured Certificates of Deposits (CDs) have one year to maturity. They pay interest and principal at maturity or $375,619.20 at maturity, providing an annual rate of 7.61%. (3) Uninsured Certificates of Deposits (CDs) have five years to maturity. They also pay interest and principal at maturity, with a maturity value of $235,658.27, providing an annual rate of 8.71%. Bud Fogerty asks you to answer the following specific questions. a. Explain to the other bank managers the concept of a bank's duration gap and how it differs from a bank's funding gap. b. Calculate the bank's duration gap. Given this gap, what is the likely expected change in the market value of the bank's equity if rates rise by 1%. c. Calculate i. the expected net income ii. the net interest margin based on the current market values for the assets and liabilities and the annual compound yields (rates) that are given. iii. the bank's one year funds gap iv. the expected change in net interest income and the expected NIM with a 1% rise in rates based on this fund gap. d. How can you achieve a duration gap closer of zero? What is the implied effect on the bank's expected net interest income and net interest margin? Explain why. s.pdf w19as3sol.doc.pdf 49f233c38bee8583... Create account Login Balance Sheet for a Simplified Bank Assets Cash Gov. Securities $ 100,000.00 190,476.19 Fixed Rate Mortgage Loans 600,000.00 Fixed Rate Commercial Loans 300.000.00 Fixed Rate CDs Total Assets Total Assets Liabilities Demand Deposits Savings Accts. Insured CDs Equity $ 400,000.00 176,000.00 352,330.18 162.555.83 $1,090,886.01 99,590.17 $1,190,476.19 $1,190,476.19 Total Liabilities $1,190,476.19 Total Liabilities & Equity Information on Individual Assets (1) The Government Securities are discount securities with one year to maturity. The maturity value is $200,000, yielding an annual rate of 7.71%. (2) The Fixed Rate Mortgage Loans are amortized loans with 10 years to maturity. The annual payment for the loans is $88,251.58 which is paid at the end of each year. The annual rate for the loans are 5%. (3) The Fixed Rate Commercial Loans are structured to pay interest only each year, and a maturity value of $300,000. The maturity is 3 years. The annual interest rate is 8.71%. All assets are issued at current market rates, so the values on the current balance sheet are market values. Information on Individual Liabilities (1) Demand Deposits and Savings Accounts have no maturity. (2) Insured Certificates of Deposits (CDs) have one year to maturity. They pay interest and principal at maturity or $375,619.20 at maturity, providing an annual rate of 7.61%. (3) Uninsured Certificates of Deposits (CDs) have five years to maturity. They also pay interest and principal at maturity, with a maturity value of $235,658.27, providing an annual rate of 8.71%. Bud Fogerty asks you to answer the following specific questions. a. Explain to the other bank managers the concept of a bank's duration gap and how it differs from a bank's funding gap. b. Calculate the bank's duration gap. Given this gap, what is the likely expected change in the market value of the bank's equity if rates rise by 1%. c. Calculate i. the expected net income ii. the net interest margin based on the current market values for the assets and liabilities and the annual compound yields (rates) that are given. iii. the bank's one year funds gap iv. the expected change in net interest income and the expected NIM with a 1% rise in rates based on this fund gap. d. How can you achieve a duration gap closer of zero? What is the implied effect on the bank's expected net interest income and net interest margin? Explain why.

Answer rating: 100% (QA)

Answer a The duration gap of a bank measures the difference between the durations of its assets and liabilities Duration represents the sensitivity of the market value of an asset or liability to chan... View the full answer