Question

please solve question 4 and 5

4. A bank has the following balance sheet: Assets Rate sensitive Fixed rate Nonearning Total Avg. Rate 7.75% 8.75 Avg Rate 6.25% 7.50 $550,000 955,000 565,000 $2,070,000 Liabilities/Equity Rate sensitive $375,000 Fixed rate 805,000 Nonpaying 890,000 Total $2,070,000 ise 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, gap to total assets ratio 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. 5. If a bank manager is certain that interest rates were going to increase within the next six months, how should the bank manager adjust the bank's maturity Rap to take advantage of this anticipated increase? What if the manager believes rates will fall?

Answer 1

4.

a.) Reprising Gap = Rate sensitive assets-Rate sensitive liabilities =$550000-$375000 =$175000

Gap to total assets ratio= Rate sensitive assets/Total Assets =$550000/$2070000 =26.57%

Gap Ratio= Rate sensitive assets/ Rate senistive liabilities=$550000/$375000=146.67

b) Resulting change in the banks interest income= $550000*0.45%=$2475 increase

  Resulting change in the banks interest expense=$375000*0.35% =$1312.5 increase

c) Net increase in the interest income= $2475-$1312.5=$1162.5

5. If the bank manager was certain that the interest rates were going to increase he should have bought more assets which are risk sensitive and sell off risk sensitive liabilities to take advantage of the situation.

If the rates were expected to fall he should have done vice versa