# Suppose that ABC bank and DEF bank have the following assets and liabilities: ABC bank Assets

## Question:

Suppose that ABC bank and DEF bank have the following assets and liabilities:

**ABC bank**

**Assets**

$200 million five-year floating-rate bonds (Libor + 7%) (Interest rate is adjusted annually)

**Liabilities**

$200 million five-year fixed-rate CDs (9%)

**DEF bank**

**Assets**

$200 million five-year fixed-rate loans (16%)

**Liabilities**

$200 million five-year floating-rate CDs (Libor + 5%) (Interest rate is adjusted annually)

**Required:**

**a.** What is the risk exposure of ABC bank?

**b. **What is the risk exposure of DEF bank?

**c.** Using the repricing gap model, what is the impact over the next year on net interest income of ABC bank if interest rate rises by 200 basis points?

**d. **Using the repricing gap model, what is the impact over the next year on net interest income of DEF bank if interest rate falls by 200 basis points?

**e.** If these two banks were to enter into a swap arrangement,

** e1)** diagram the cash flows of this swap contract

** e2)** given that swap rate is 13% fixed for Libor+2.5% variable, would this swap rate be acceptable by both banks? Explain why.

**Related Book For**

## Macroeconomics Principles and Applications

ISBN: 978-1111822354

6th edition

Authors: Robert E. Hall, Marc Lieberman