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

Question

4. (6 points) Consider the following balance sheet for a bank (in millions) ssets. Floating-rate mortgages (6-mon adj.) S50 30-year fixed-rate loans Demand deposits (0%) $70 $20 $10 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. one year RSL of the bank = $ 0

(1 year CDs carry a fixed interest hence are not sensitive)

2. Gap = RSA- RSL

RSA = floating rate mortgages = $50 million

Hence Gap = $50 million

3. Change in Net Income= Gap * Change in interest

= $50 million * 1%

= Increase of $ 5 million

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