What happens to Badlands Bank (balance sheet below) if interest rates increase by 100 basis points? Assume a rate sensitivity of 40% for relevant asset items, and of 90% for relevant liability items. That is, the 100 bps interest rate change will not translate into 100 bps rate changes on asset and liability items.

What can Badlands Bank do to navigate this situation?

 

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Assets Amount Rate Liabilities Amount Rate $75 $50 $150 $400 $200 $125 Interbank market 1 day Demand deposits $50 $600 $225 Cash 0% 3.5% Securities - Trading Securities – Investment Loans - variable rate 5% 3% 5% Long-term debt fixed 4.5% 7% Loans – fixed rate 8% Non-earning assets Equity $125 Total $1,000 $1,000 Assets Amount Rate Liabilities Amount Rate $75 $50 $150 $400 $200 $125 Interbank market 1 day Demand deposits $50 $600 $225 Cash 0% 3.5% Securities - Trading Securities – Investment Loans - variable rate 5% 3% 5% Long-term debt fixed 4.5% 7% Loans – fixed rate 8% Non-earning assets Equity $125 Total $1,000 $1,000

Answer rating: 100% (QA)

Solution If interest rate in this case increases with 1 then assets will ... View the full answer