Question

please solve question number 1, 2, and 3 thank you

1. Nearby Bank has the following balance sheet (in millions): Assets Liabilities and Equity Cash $90 Demand deposits $230 5-year Treasury notes 170 7-year certificates of deposit 170 30-year mortgages 290 Equity 150 Total assets $550 Total liabilities and equity $550 • What is the maturity gap for Nearby Bank? Is Nearby Bank more exposed to an increase or decrease in interest rates? Explain why? 2. A bank has the following balance sheet: 000 Assets Avg Rate Liabilities/Equity Avg Rate Rate sensitive $350,000 7.75% Rate sensitive $475,000 6.25% Fixed rate 955,000 8.75 Fixed rate 805,000 7.50 Nonearning 765.000 Nonpaying 790,000 Total $2,070,000 Total $2,070,000 Suppose interest rates fall such that the average yield on rate-sensitive assets decreases by 15 basis points and the average yield on rate-sensitive liabilities decreases by 5 basis points. a) Calculate the bank's CGAP, gap to total assets 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 this change in net interest income. 3. What is a maturity gap? How can the maturity model be used to immunize (hedge) an Fi's portfolio?

Answer 1

Question No.1.

What is maturity gap:

Maturity gap is the difference between the average maturity of assets and liabilities.

From the given balance sheet, nearby bank is exposed to increase or decrease in interest rates. Reason: Its assets and liabilities consists of Treasury bills and certificate of deposits, which carries fixed interest. But, it has a 30 years mortgage, for which interest will be floating.

As a result, in case of increasing interest, mortgage assets will gain more income and in case of decreasing interests, interest income will come down.

Question No3:

Maturity gap is the difference between the average maturity of assets and liabilities. If the maturity gap is zero, it is possible to immunize the portfolio, so that changes in interest rates will result in equal but offsetting changes in the value of assets and liabilities and net interest income.