You are asked to determine the market value (mark-to-market) balance sheet for Blackburn State Bank and loan
Question:
- You are asked to determine the market value (mark-to-market) balance sheet for Blackburn State Bank and loan duration (amounts in $ thousands and duration in years):
Book Value Market Value
Assets Amount Amount Duration
T-bills $ 360 $ 360 0.50
Loans* 10,000 _______ ______
Total Assets 10,360 _______
Liabilities
Deposits 8,368 8,368 0.50
Total Liabilities 8,368 8,368
Equity 1,992 _______
Total Lia and NW 10,360 _______
*Since this is a simple bank, it has only one type of loan. The loan has a $10,000 book value (current outstanding principal), “ amortized” loan with annual payments , an interest rate of 6.5 percent, and 20-years to maturity. Similar amortized loans today ( market interest rate for similar loans ) have an interest rate of 7 percent which, is the market yield .
- Using Excel, determine the market value and duration of the loan and fill in the blanks in the balance sheet above. Please include a copy of your Excel Spreadsheet with your completed exam (you can copy and paste as a picture).
- What is the average duration of all the assets and what is the average duration of all the liabilities?
Average Duration of Assets:
Average Duration of Liabilities:
c. What is the leverage-adjusted duration gap? Is Angus State Bank exposed to interest rate risk? Is it exposed if interest rate increase or decrease ?
Leverage-adjusted duration gap (DG) = DA – kDL=___________?
d. What is the forecasted impact on the market value of equity caused by a relative 1.5 percent upward shift in the entire yield curve? [i.e., Dr/(1+r) = 0.0150]?
The market value of the equity will change by the following:
MVE = -DG * (A) * r/(1 + r) =______________?
e. What variables are available to the financial institution to immunize or at least reduce interest rate risk exposure on the balance sheet? Taking one variable at a time, how much would each variable need to change to get DGAP equal to 0?
To immunize the institution for interest rate risk, the Leverage Adjusted DG needs to be zero:
Hint: DG = D A –kD L = 0
Statistics for Business and Economics
ISBN: 978-0132930192
8th edition
Authors: Paul Newbold, William Carlson, Betty Thorne