Reference no: EM13502461

1.         Consider the following balance sheet positions for a financial institution: 

·         Rate-sensitive assets = $200 million.  Rate-sensitive liabilities = $100 million

 ·         Rate-sensitive assets = $100 million.  Rate-sensitive liabilities = $150 million 

·         Rate-sensitive assets = $150 million.  Rate-sensitive liabilities = $140 million

a.  Calculate the repricing gap and the impact on net interest income of a 1 percent increase in interest rates for each position.

b.  Calculate the impact on net interest income on each of the above situations assuming a 1 percent decrease in interest rates.

c.What conclusion can you draw about the repricing model from these results?

2.What are the reasons for not including demand deposits as rate-sensitive liabilities in the repricing analysis for a commercial bank? What is the subtle but potentially strong reason for including demand deposits in the total of rate sensitive liabilities? Can the same argument be made for passbook savings accounts?

3.What is the spread effect?

4.Use the following information about a hypothetical government security dealer named M.P. Jorgan. Market yields are in parenthesis, and amounts are in millions.

          Assets                                                                 Liabilities and Equity

         Cash                                                    $10         Overnight repos                          $170

         1-month T-bills (7.05%)                        75         Subordinated debt

         3-month T-bills (7.25%)                        75         7-year fixed rate (8.55%)              150

         2-year T-notes (7.50%)                         50

         8-year T-notes (8.96%)                       100

         5-year munis (floating rate)

               (8.20% reset every 6 months)         25         Equity                                             15

         Total assets                                        $335         Total liabilities & equity              $335

a.What is the repricing gap if the planning period is 30 days? 3 months? 2 years? Recall that cash is a non-interest-earning asset.

b.What is the impact over the next 30 days on net interest income if interest rates increase 50 basis points?  Decrease 75 basis points?

c.The following one-year runoffs are expected:  $10 million for two-year T-notes and $20 million for eight-year T-notes. What is the one-year repricing gap?

d.If runoffs are considered, what is the effect on net interest income at year-end if interest rates increase 50 basis points?  Decrease 75 basis points?

5.A bank has the following balance sheet: 

Assets                                         Avg. Rate        Liabilities/Equity                     Avg. Rate

Rate sensitive        $550,000         7.75%           Rate sensitive     $375,000          6.25%         

Fixed rate                755,000         8.75              Fixed rate             805,000          7.50

Nonearning            265,000                               Nonpaying         390,000

   Total                $1,570,000                                 Total             $1,570,000

 Suppose interest rates rise such that the average yield on rate-sensitive assets increases by 45 basis points and the average yield on rate-sensitive liabilities increases by 35 basis points.

 a.Calculate the bank’s repricing GAP and gap ratio.

b. Assuming the bank does not change the composition of its balance sheet, calculate the resulting change in the bank’s interest income, interest expense, and net interest income.

c.Explain how the CGAP and spread effects influenced the change in net interest income.