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(40 Points) As the new management trainee at the Rossville Bank of Tennessee, you are given balance sheet, you have been asked by the bank president to determine the current mark-to-market balance sheet and modified durations for the banks assets and liabilities. Fill in the blanks with market values and modified durations. Some of this information is already filled in. The bank has only three types of assets and two types of deposits. Amounts are in S thousands and duration in years. the book value Rossville Bank of Tennessee Statement of Financial Condition (December 1,2018) Assets (000) Value Cash & Reserves Book Valc Market S 50 S 50 One-Year Maturity Loans S450 Two-Year Maturity Loans S500 Total Assets 1,000 One-year maturity loans were made recently, where an interest rate of 8.0% will be paid at the end of the year; however, if these loans were made today the market interest rate (todays rate) would be 7.0%-the loans will mature in exactly one year when all annual principal and interest will be received. *Two-year loans were made when interest rates were at 8 %; however, if these loans were made today, the market rate would be 7,5% . the loans will mature in two years and will be amortized in twe equal annual payments. Liabilities&Net Worth0 Demand Deposits One-Year CDs ok Valuc Market S 500 S 500 S 440 One-Year CDs were deposited yesterday by one of the areas investors at an interest rate of 4%. Both principal and interest (of 4%) will be paid in one year at maturity. The market yield on these CDs is still 4% today. S 40 Accum Retained Eamings 0 MVE* Total Liab&Net Worth $1000 MVE is market value of equity-MV of Assets minus MV if Liabilities. Calculate and fill in the blanks above for Market Values
Calculate and fill in the blanks above for Market Values and Modified Durations: of Assets, Liabilities and Equity a. What is the modified duration and the market value of the one-year maturity loan? MV One-Year Maturity Loans Modified Duration = b. What is the modified duration and the market value of the two-vear maturity amortized loan with two equal annual payments, a par value of S500 originally issued with an interest rate of 8 %, but if issued today would yielding 7,2%. Place all values in the mark-to-market balance sheet above. 500 1-(1.085) Loan payment- 08S Ya Payment (075 PV Duration Modified Duration c. What is the modified duration and the market value of the one-year maturity CDs? MV One-Year Maturity CDs Modified Duration = d. What are the weighted average modified durations of both Assets and Liabilities? NEL e. Using weighted average modified durations for the banks assets and liabilities, what will be the change in the market value of net worth or equity, (ΔΕ) if interest rates were to increase by 200 basis points (Ar-2%). Assume a parallel shift in the yield curve.
t What are possible approaches available to the bank to immunize balance sheet interest rate risk?Show work
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