Your employer has asked you to examine the interest-rate risk of your bank relat
ID: 2735923 • Letter: Y
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.
QUESTION:
Using the net worth formula, if interest rates rise by 3%, what will be the expected change in the market value of net worth for:
A.) Your firm?
B.)Your competition?
Please add calculation. Thanks
Bank Balance Sheet Competition Your Firm Amount Smillions Duration ears Amount Smillions Duration ears 4 0.0 0.0 Reserves and cash items Securities 0.6 1.6 5.0 0.3 1.2 4.0 4 Less than 1 year 1-2 years Greater than 2 years 0.9 4.4 Residential mortgages Variable-rate Fixed-rate (30 years) 0.4 5.5 17 30 30 0.6 1.4 5.4 0.0 Commerical loans 0.9 1.8 6.0 0.0 Less than 1 year 1-2 years 13 31 Greater than 2 years Physical capital 25 10 Liabilities Checkable deposits Money market deposit accounts Savings deposits CDs 1.0 0.5 1.0 14 10 12 6 1.0 0.6 1.0 16 0.4 0.3 1.1 2.9 0.0 12 14 10 10 14 0.6 0.5 1.8 2.2 0.0 Variable-rate Less than 1 year 19 1-2 years Greater than 2 years 15 10 12 39 Fed funds Less than 1 year 1-2 years Greater than 2 years 0.4 1.2 2.9 18 12 31 0.7 1.8 3.8Explanation / Answer
Your Firm Competition
Asset use of fund amount asset use of fund amount
Variable-rate loans 40 Variable-rate loan 45 Reserves 10 Reserves 15
10-year zeros 50 20-year zeros 40
Total assets 100 Total assets 100
Liability liability
Variable rate deposite 30 Variable rate deposite 35
5 years zero 68 10 years zero 57
Net worth 2 net worth 8
Your Firm Competition
Asset use of fund amount asset use of fund amount
Variable-rate loans 40 Variable-rate loan 45 Reserves 10 Reserves 15
10-year zeros 50 20-year zeros 40
Total assets 100 Total assets 100
Liability liability
Variable rate deposite 30 Variable rate deposite 35
5 years zero 68 10 years zero 57
Net worth 2 net worth 8
a.Your &rm:&Net Worth =±&i%&DUR=±(±3%)&1:53 = 4:59%of Total Assets ($4.59 million)
b.Your competition:=&(&3%)±1:80 = 5:41%of Total Assets ($5.41million)
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