List the items in a T account

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Reference no: EM132755191

Question - CIBC Bank has the following hypothetical items in its balance sheet as at December 31 2019

Rate sensitive Asset $10m

Rate sensitive Liabilities $60m

Fixed rate assets $90m

Fixed rate liabilities $30m

Capital $10m

Assume the duration of the assets is 5 years and that of its liabilities is 2 years. Assume the interest rates are initially 10%.

1. List the above items in a T account.

2. What is the income gap for the bank?

3. What will happen to the income of the bank if interest rates decreased by 5%? Explain using gap analysis.

4. The bank manager overheard that Bank of Canada is planning to increase the interest rates. He decided not to take any action as CIBC bank will benefit a lot from the interest rates being increased. Would you agree with the manager's decision? Why or why not?

5. If interest rates decreased from 10% to 4% calculate the change in the market value of the net worth as a percentage of total assets. Explain using gap analysis.

6. Assume that the bank manager is expecting an increase in the interest rates, and he decided to make the duration of the asset longer to mitigate interest rates risk. Would you agree with him? Why or why not?

Reference no: EM132755191

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