Question

please solve 4, and 5.

175 110 4. County Bank has the following market value balance sheet (in millions, all interest at annual rates). Assets Liabilities and Equity Cash $85 Demand deposits $185 10-year commercial loan at 10% 5-year CDs at 6% interest, interest, balloon payment balloon payment 235 15-year mortgages at 8% interest, 30-year debentures at 7% interest, balloon payment 440 balloon payment Equity Total assets $700 Total liabilities & equity $700 a) What is the maturity gap for County Bank? b) What will be the maturity gap if the interest rates on all assets and liabilities increase by 1%? c) How much will the market value of equity change in USD)? 170 5. Market yields are in parentheses. 1 year UK UBOR = 5.5%; 1 year US LIBOR = 6.35% Assets Liabilities and Equity Cash $385 Overnight repos $390 1-year US T-bills (6.85%) $250 1 year UK CD's (6.25%) 1-year UK Govt Bonds (6.5%) (£140 @ $1.25 per E) $175 (£80 @ $1.25 per £) $100 10-year UK floating notes 10-year US T-notes (7.15%) $355 (LIBOR +0.2% £252 10-year US floating munis @$1.25 reset annually) $315 (LIBOR +0.65% reset annually) $60 10-year fixed rate (7.45%) $100 Equity 170 Total assets $1,150 Total liabilities and equity $1.150 a) What is the repricing GAP for a one year maturity bucket? b) If interest rates rise on assets by 65 basis points and rise 35basis points on liabilities, what is the change in Net Interest Income (NII)? c) Is this change in Net Interest Income due to the Spread Effect or the CGAP Effect? d) Is BAC net long or net short? e) If the value of the changes to $1.58, what effect (tor ) will this have on (NII)? What if the E = $1.03?

Answer 1

County Bank Requirement a MA = [Ox$85 + 10x$175 + 15x$440]/$700 = 11.93 years. ML = [Ox$185 +5x$235 + 30x$110]/$530 = 8.44 years. MGAP = 11.93-8.44 = 3.49 years. Requirement b If interest rates increase one percent, the value and average maturity of the assets will be: Cash = $85 Commercial loans = $17.5xPVAn = 10, I = 11% + $175xPV n =10,1 = 11% = $164.70 Mortgages = $35.2 x PVA n = 15,1 = 9% + $440 x PV n = 15,1 = 9% = $404.52 MA = [Ox$85 + 10 x $164.70 + 15 x $404.52]/($85 + $164.70 + $404.52) = 11.79 years The value and average maturity of the liabilities will be: Demand deposits = $185 CDs = $14.10 x PVAn = 5,1 = 7% + $235 x PVn=5,1 = 7% = $225.37 Debentures = $7.7 x PVAn = 30, 1 = 8% + $110 x PVn = 30,1 = 8% = $97.62 ML = [0 x $185+5 x $225.37 + 30 x $97.62]/($185 +$225.37 + $97.62) = 7.98 years The maturity gap = MGAP = 11.79-7.98 = 3.81 years. The maturity gap increased because the average maturity of the liabilities decreased more than the average maturity of the assets. This result occurred primarily because of the differences in the cash flow streams for the mortgages and the debentures. Requirement c The market value of the assets has decreased from $700 to $654.22, or $45.78. The market value of the liabilities has decreased from $530 to $507.99, or $22.01. Therefore, the market value of the equity will decrease by $45.78 - $22.01 = $23.77, or 13.98 percent.