Your employer has asked you to examine the interest-rate risk of your bank relat

Question

Your employer has asked you to examine the interest-rate risk of your bank relative to your direct competition. Management is concerned that interest rates will fall by the end of the year and wants to see what would happen to the relative profitability of the firm if the decline actually occurs.

Interest-rate risk depends on each bank's relative position of interest-sensitive assets and liabilities. You begin the analysis by collecting the information and estimates.

please show clear calculation process

Bank Balance Sheet Competition Your Firm Duration ears Duration Amount Amount Smillions rs Assets Reserves and cash items 4 0.0 0.0 0.6 1.6 5.0 0.3 1.2 4.0 Less than 1 year 1-2 years 9 Greater than 2 years Residential mortgages 0.4 5.5 0.9 4.4 Variable-rate 15 Fixed-rate (30 years) Commerical loans 0.6 1.4 5.4 0.0 30 0.9 1.8 6.0 0.0 13 31 Less than 1 year 1-2 years Greater than 2 years Physical capital 25 10 Liabilities Checkable deposits Money market deposit accounts Savings deposits CDs 14 9 16 1.0 0.5 1.0 1.0 0.6 10 12 6 0.4 0.3 1.1 2.9 0.0 0.6 0.5 1.8 2.2 0.0 Variable-rate Less than 1 year 14 10 10 14 19 1-2 years Greater than 2 years 15 10 12 39 Fed funds Borrowings Less than 1 year 1-2 years Greater than 2 years 0.4 1.2 2.9 18 12 31 0.7 1.8 3.8

Explanation / Answer

Net worth = Assets - Liabilities

Answer 8 and 9)

The change in interest rate will only impact the risk sensitive asset and liabilities not the all . The Net worth for both banks at intial condition is given in table above .

Now with the decline and Increase of interest rate to 3% .

Answer 10)

a ) To eliminate the income gap can be done :

B)  Immunization, sometime called "multiperiod immunization," is a systematic strategy used by financial institutions to match the durations of interest sentive assets and liabilities, thereby minimizing the impact of interest rates on the net worth.It can to done by either Cash Flow Matching Immunization or Duration Matching Immunization.

In duration matching process , an investor must match the portfolio's duration to the investment time horizon in the financial statement of bank

Your Firm Competitors Amount(millions) Duration (yrs) Net change in Interest (-3) New value(3) Net change in Interest (3) New value(-3) Amount(millions) Duration (yrs) New value(3) Net change in Interest (3) Net change in Interest (-3) New value(-3) Assets R&C 3 0 3 3 4 0 4 4 Securities Less than 1 year 4 0.6 0.018 4.072 -0.018 3.928 5 0.3 0.009 5.045 -0.009 4.955 1-2 yrs 3 1.6 0.048 3.144 -0.048 2.856 7 1.2 0.036 7.252 -0.036 6.748 greater than 2yrs 7 5 0.15 8.05 -0.15 5.95 9 4 0.12 10.08 -0.12 7.92 Residential Mortgages Variable rate 9 0.4 0.012 9.108 -0.012 8.892 21 0.9 0.027 21.567 -0.027 20.433 Fixed rate(30yrs) 15 5.5 15 15 17 4.4 17 17 Commercial Loans Less than 1 year 13 0.9 0.027 13.351 -0.027 12.649 30 0.6 0.018 30.54 -0.018 29.46 1-2 yrs 31 1.8 0.054 32.674 -0.054 29.326 22 1.4 0.042 22.924 -0.042 21.076 greater than 2yrs 55 6 0.18 64.9 -0.18 45.1 30 5.4 0.162 34.86 -0.162 25.14 Physical capital 10 0 10 10 25 0 25 25 Total Assets 150 163.299 136.701 170 178.268 161.732 Liabilities Checkabledeposits 10 1 0.03 10.3 -0.03 9.7 14 1 0.03 14.42 -0.03 13.58 Money market 5 0.6 0.018 5.09 -0.018 4.91 9 0.5 0.015 9.135 -0.015 8.865 Saving deposit 12 1 0.03 12.36 -0.03 11.64 16 1 0.03 16.48 -0.03 15.52 CDS Variable rate 6 0.4 0.012 6.072 -0.012 5.928 12 0.6 0.018 12.216 -0.018 11.784 Less than 1 yrs 19 0.3 0.009 19.171 -0.009 18.829 14 0.5 0.015 14.21 -0.015 13.79 1-2 yrs 8 1.1 0.033 8.264 -0.033 7.736 10 1.8 0.054 10.54 -0.054 9.46 greater than 2 yrs 15 2.9 0.087 16.305 -0.087 13.695 10 2.2 0.066 10.66 -0.066 9.34 Fed funds 10 0 10 10 14 0 14 14 Borrowings Less than 1 yrs 12 0.4 0.012 12.144 -0.012 11.856 18 0.7 0.021 18.378 -0.021 17.622 1-2 years 9 1.2 0.036 9.324 -0.036 8.676 12 1.8 0.054 12.648 -0.054 11.352 greater than 2 yrs 39 2.9 0.087 42.393 -0.087 35.607 31 3.8 0.114 34.534 -0.114 27.466 Total Liabilities 145 151.423 138.577 160 167.221 152.779 Net Worth 5 11.876 -1.876 10 11.047 8.953 Net worth Change 6.876 -6.876 1.047 -1.047

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