4. (6 points) Consider the following balance sheet for a bank (in millions) Asse

Question

4. (6 points) Consider the following balance sheet for a bank (in millions) Assets Floating-rate mortgages (6-mon adj.) S50 30-year fixed-rate loans Demand deposits (0%) $70 $20 S10 $50 One year CDs (196) Equity Total Assets $100 Total Liabilities&Equity; $100 The one year RSL is Hint: demand deposits pay 0% interest rate, thus not affected by interest rate risk. Workout: The one year cumulative repricing gap (i.e., RSA-RSL) is Workout: The market interest rates are forecasted to increase by 100 basis points. The dollar change in the net interest income of the bank will be Workout:

Explanation / Answer

1) Equity and Demand Deposits (which are 0% and are not affected by rate movement) would not be considered as RSL (Rate Sensitive Liabilities). Hence, only 1 year CD would be considered as RSL which is $20 million.

2) RSA in the 6-month bucket = $50 million; RSL in 1 year bucket = $20 million. The one year cumulative repricing gap is $30 million

3) For a 1 year period, my RSA will give me incremental income of $50 million * 1%*0.5 = $0.25 million. My RSL resets in 1 year, hence, it won't impact my 1 year income. Thus, Net Interest Income would increase by $0.25 million

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