Please help with my homework!: Suppose Hill Country Bank starts with the followi
ID: 1190375 • Letter: P
Question
Please help with my homework!:
Suppose Hill Country Bank starts with the following:
Initial Balance Sheet
Assets
Liabilities and Net Worth
Reserves 10
Securities 30
Loans 110
TOTAL 150
Checking Deposits 50
Nontransaction Deposits 50
Net Worth 50
TOTAL 150
a. Complete the following income statement, assuming that the interest rate it earns on securities (T-Bills) is 4% and that the interest rate it earns on loans is 8%, while the interest it must pay on savings accounts is 4%
Income Statement
For the year ended December 31, 2021
Interest Income
Securities (4% x $ ____) = $________
Loans (8% x $_____ ) = $________
Total $_______
Noninterest Income $5.00
(letters of credit)
TOTAL INCOME $_____________
Interest Expense (4% x $____) = $_______
(savings accounts)
Noninterest Expense $6.00
(salaries, etc.)
TOTAL EXPENSE $_____________
PROFITS (Income – Expense) $_____________
ROA = profits/assets = ________________%
ROE = profits/net worth = _________________%
b. Calculate Hill Country Bank’s rate-sensitivity gap.
c. Calculate its new rate-sensitivity gap if a depositor moved $5 from his savings account to his checking account. Show your work.
d. Would the change from part b to part c be good or bad? Explain.
Initial Balance Sheet
Assets
Liabilities and Net Worth
Reserves 10
Securities 30
Loans 110
TOTAL 150
Checking Deposits 50
Nontransaction Deposits 50
Net Worth 50
TOTAL 150
Explanation / Answer
Income Statement
For the year ended December 31, 2021
Interest Income
Securities (4% x $ 30) = $1.20
Loans (8% x $110 ) = $8.80
Total $10.00
Noninterest Income $5.00
(letters of credit)
TOTAL INCOME $15.00
Interest Expense (4% x $50) = $2
(savings accounts)
Noninterest Expense $6.00
(salaries, etc.)
TOTAL EXPENSE $8
PROFITS (Income – Expense) $7
ROA = profits/assets = 7/150*100 = 4.67%
ROE = profits/net worth = 7*100/50 = 14%
b) Bank's rate senstivity gap = interest rate sensitive assets - interest rate sensitive liabilities
= $140 - $50 = $90
c) Now if $5 is moved from savings a/c to checking deposit, new rate senstivity gap = $140 - $45 = $95
d) This is a good thing as now bank's is showing that the interest earning assets are more that liabilities
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