u,
u,
u,
u,
u,
en
u,
.,4::::.
w
N
I
I
-
(fl
::,
3
0
V,
::,
,-+
V,
Cl)
,-+
::r
::::r
,-+
0-
I
CD
-,
3
cc
0
<
CD
-,
::,
3
CD
::,
,-+
V,
CD
n
C:
-,
,-+
CD
V,
0
-+,
V,
Cl)
::,
CD
n
Cl)
0
..
V,
3
::J
<
Cl)
V,
<
CD
,-+
::,
0
,-+
::r ·'-'
CD
-,
::,
-.J
Q)
-,
CD
0Q)
::,
0
C:
::J
,-+
::,
cc
3
CD
,-+
Q)
,-+
Q)
--<
V,
(")
0
C
-
::r c..
-+,
0
c.. ::,
V,
Q)
·'-' ::,
. (")
Q)
::J
V,
r-+
r-+
Q)
n
3
"'O
0
-,
,-+
Q)
::,
,-+
,-+
0
V,
3
CD
(")
-+,
0
::,
C:
::,
,-+
::,
cc
""O
-,
Q)
(")
,-+
(")
CD
V,
C:
::J
0...
CD
-,
Q)
::,
(")
Q)
:::,Q)
,-+
Q)
-,
CD
c..
:::,-
,-+:
::J
:::,-
Q)
n
0-
Q)
-
::J
·'-'
Q)
"'O
"'O
CD
0
-,
CD
I
Cl)
-,
:::,-
Cl)
n
n
n
C:
::,
:::,-
0
CD
::J
c..
-,
Q)
::,
<
--<
0
,-+
:::,-
(")
CD
-,
V,
::,
-,
CD
·'-'
-,
Q)
-,
V,
<
::J
-,
CD
V,
c..
0
CD
V,
,-+
V,
::r
Q)
0
=i
Q,)
("')
CD
r-+
::J""
-<
Q)
-;;::;-
V,
0
::J""
0
=i
n
0
CD
n
,-+
0
::,
0
-+,
(fl
0
en
3
0
.,4::::.
::J
3
Q)
0
::J
..._,;, 0::z::
Cl.
-+,
- ..
-+,
(fl
::r en
::J
Q,)
CD
0-
0-
Q)
,-+
CD
c..
<
-,
C:
0-
CD
Q)
,-+
0
V,
CD
-,
::J
Cl.
Cl.
CD
"'O
0
en
r-+
en
CD
Q)
::,
;::;:-
V,
-
(fl
V,
"'O
Q)
;:::..·
CD
-,
0-
CD
CD
CD
V,
<
3
CD
3
::r
n
V,
V,
CD
V,
:J:J ::J
,CD
::::::J
Q)
I
I
-,
0
c..
:::,-
CD
"'O
Cl)
--<
-,
3V, 3
V,
·'-'
"'O
-+,
-+,
,-+
-,
CD
3
0
C
en
,-+
Cl)
,-+
0
V,
V,
-,
CD
r-+
0
I
0
::r
::::::J
Cl.
CD
--<
V,
::J
Cl)
Cl)
,-+
,-+
n
::J
..
0
C:
::J
0
-+,
Cl)
0-
0-
00
--<
,-+
:::,-
u,
:::,-
0
-+,
::::::J
u,
0
-,
,-+
Cl)
Cl)
n
n
,-+
c..
,-+
::::::J
Cl.
Q)
n
n
0
Cl)
-,
-,
::::::J
:J:J
0
-,
CD
,-+
Cl.
CD
I
0
-,
,-+
Cl)
CD
"'O
"'O
V,
0
-
3
CD
-·
"'O
,-+
0
,-+
-,
::::::J
::r n
,-+
V,
V,
3
3·
V,
:::,-
V,
0
cc
<
CD
3 cc
Cl)
::::r
,-+
::J
·'-'
CD
-,
"'O
V,
0
,-+
V,
0
·'-'
3
0
V,
-+,
3
Cl)
CD
"'O
CD
,-+
CD
V,
c..
--<
-,
C:
3
CD
CD
n
CD
0
V,
CD
CD
CD
·'-' n
,-+
CD
Cl)
CD
-,
-,
,-+
c..
,-+
CD
CD
CD
::J
V,
CD
"'O
V,
V,
,-+
::::::J
Cl)
"'O
c..
::::r
0
-,
0
Cl)
::,
CD
c..
Cl)
-,
n
;ii=";
CD
n
Cl)
::::::J
c..
Cl)
::::::J
CD
Cl)
0-
,-+
-+,
-+,
,-+
::::::J
n
,-+
C:
::r
-,
Cl)
0
::,
,-+
,-+
;:::..· c..
::,
::r
::,
::::r
Cl)
0
V,
V,
,-+
V,
Cl)
0
V,
CD
"'O
n
n
"'O
,-+
..
;::;:-
::,
N
.,4::::.
3
,-+
V,
0
-+,
0
..::,
(fl
u, "'O
-,
N
(fl
<
Q)
N
3
,-+
0
CD
0
-+,
- ..
3
0
::,
c..
0
..::,
(")
Q)
V,
CD
"'O
0
V,
,-+
V,
--<
V,
V,
C
CD
c..
3
::r
Cl)
,-+
,-+
::r CD
CD <
CD
3
V,
::J
r-+
:::r
CD
,-+
"TI
CD
Cl.
CD
-,
Q,)
CD
C"")
Cl)
,-+
• V,
C
=
n
:c
,..
::::r
Cl)
::,
Cl)
Cl)
CD
CD
::::::J
c..
::r 3
0
::,
V,
V,
V,
V,
c..
V,
CD
CD
cc
<
CD
V,
·'-' ;:i
Cl)
0-
,-+
<
-,
0
::r
o·
c..
C:
::,
CD
"'O
"'O
Cl)
3
Cl)
V,
C:
V,
CD
CD
::r
CD
V,
n
n
0-
::r
n
::::r
V,
Cl)
Cl)
--< --<
-,
r+
Cl)
-,
CD
CD
-+,
CD
::::r -,
Cl)
,-+
CD
,-+
0
-,
Cl)
-,
CD
Cl)
;:::..· Cl)
-,
V,
..
CD
"'O
,-+
r+
0
I
Cl)
::,
n
Cl)
Cl)
,-+
V,
Cl)
::::r -,
Cl)
c.. ::r
CD
::r
0
r+
"'O
CD
0
CD
"'O
c.. ::r
Cl)
.,4::::. "'O
Cl)
V,
c..
Cl)
U)
C:
u,
I
I
I
0
::J
3
Q,)
-,
CD
r-+
\~-
5-13. Who are banking's chief competitors in the financialservices marketplace?
5-14. How do the financial statements of major nonbank
financial firms resemble or differ from bank financial statements? Why do these differences or similarities exist?
5-15. What major trends are changing the content ot the
financial statements prepared by financial tirms?
"
l-'1
5-16. What are the key teatures or characteristics at the
tinancial statements ot banks and simi\ar tinancia\
tirms? What are the conse(\uences ot these statement teatures tor managers ot tinancia\-ser\Jice
providers and tor the pub\ic?
Concept Check·
6-1.
6-2.
6-3.
.
.,.
.
-~ . . -. ;
,
Why should banks and other corporate financial
firms be concerned about their level of profitability
and exposure to risk?
What individuals or groups are likely to be interested
in these dimensions of performance for a financial
institution?
What factors influence the stock price of a financialservice corporation?
6-4.
ii
Suppose that a bank is expected to pay an annual
dividend of $4 per share on its stock in the current
period and dividends are expected to grow 5 percent
a year every year, and the minimum required return
to equity capital based on the bank's perceived level
of risk is 10 percent. Can you estimate the current
value of the bank's stock?
,I
er
00
...... ......
...... Q)
0
......
X
Q)
)>
c-
c-
:::J
C')
-~- - ""'
3
.c
0
CD
Cl)
(0
CD
-
i:=
:::J
0
:::J
Q)
......
Q)
Cl)
:::J
:=i,'
3
Cl)
r+
CD
0
:::,
.c
r+
:::r
.:;t"
Cl)
CD
:=i,'
Cl)
i:=
-<
CD
Q)
::-"
3
0
i:=
a
en
...
a
-~ :::r
Cl)
...... ......
0
Q)
r+
Q)
Cl)
0
)>
-~
3
<
CD
X
""C
CD
:::J
Cl)
CD
:::J
Cl)
Q)
U'I
Q)
-•
0
...:::J
3
;::::,:
a
Q)
CD
Cl)
Q)
!:!".
~0
c..
o
O,'.
en
3-
m
; -<
c..· 0.
:::,-
Q)
0
U>
-3
CD
0
:::, .
3
r+.
.;::,. :::r
-~
r+
C"')
C"'
Q)
:::J
CD
CD
.;::,.
:::r
cc
0
-,
...
•
s=:
CD
n
-- -
•
CD
3
:::J
, ...... r+
....... 0
. N
Q)
a, r+
::0
!:!". 0
i:=
U>
Cl)
Q)
n
Cl)
0
U>
r+
:::r
3
;:i
en
r+
:::J
--,
0
CD
""C
0
U>
0
i:=
Q)
-,
3
:=i,:
""C
:=i,"
0
:::J
-~
-
C"'
n
Cl)
CD
C"' ::0>
CD
Cl)
Cl)
CD
C:
CD
::0
0
)>
-,
:=i,'
Q)
Cl)
-
CD
c.. Q)
-,
.c
i:=
· 0
-,
Cl)
r+
f;;' .c
i:=
:::J
i:=
CD
cc
:::J
0
g. ·:C..
CD
Q)
Cl)
:::J
c.. -,
CD , 0
-, 0
Q)
Cl)
Cl)
CD
CD
CD
:::,
CD
r+
r+ i=
r+ -,
:::r :::J
0
CD
::0 :::J
-,
CD
0>
C"'
......:
CD
:::r
CD
r+
i:=
-<
CD
Cl)
r+
Q)
-,
--
Q)
""C
0
:::J
:=i,"
C:
CD
:::J
0
Cl)
i:=
Cl)
-, ""C
.
Cl)
Q)
0
Cl)
0
n
s: CD-,
0-,
.......
CD
......
=
'::T
Q)
c.. n
CC
0
;:::;·
Cl)
Q)
......
3
:::r ""C
Q)
...... CD
......
:=i,"
Cl)
Q)
n
CD
0.__.. c..
:::r
CD
r+
n
,~' 3. i:=
-,
<
i:=
:::J
CD
CD
Q)
;:i
CD
Q)
0
Co
:::J
cc
Cl)..
:::J
-<
0
:::r
""C
0
--· ~-3 -<""'
3
0
-·
-
Q)
U'I
U'I
3
Q)
-
a,
I
0
C"'
Q)
en
,-+
- · Q)
- --
::::s
,-+
0
::::s
,-+
CD
o,
CD
CD
"'C
CD
Q)
CD
CD
,-+
3
0
r+
0
r+
D)
D)
0
s
(h
Cl)
Cl)
-~-
C"'
U'I
0
c:·
n
Cl).
.§
n
::J
0
::J
::J
~-
0
:::r
Cl)
-<
CD
- m
- - -~g --- ---- -
CD
Q)
::::s
c..
en
,-+
cn
Cl)
CD
,-+
en
CD
Q)
::::s
::::s
Cl)
cc
Cl)
Cl)
3
Q)
cc
CD
:::s
3
Q)
Cl)
:::s
n
Cl)
::::s
,-+
Q)
CD
<CD
Q)
CD
::::s
::::S
,-+
Q)
C:
::::s
r+
CD
c..
,-+
0
,-+
CD
3
0
::::s
...
CD
,-+
::::s
CD
c..
,-+
0
N
3
0
::::s
0
S'
C:
"'C
"'C
0
::::;
Q)
r-+
Q)
r-+
n
Q)
::::s
,-+
0
Q)
en
en
CD
::::S
c.. ...
0
(h
0
::::s
,-+
::::s
Q)
::::s
C.
CD
CD
Cl)
,-+
::::s :::s
n
0
::::s 0
::::s 3
,-+
CD
CD
<
CD
::::s
C:
CD
3
3
CD
Q)
3
"'C
Q)
CD
C"'
CD
:::S
C.
Q)
::::; CD
Q)
c..
, -+
CD
,-+
CD
CD
Cl)
,-+
0
::::S
Q)
::::s
c..
0
,-+
Q)
::::s
,-+
CD
CD
Cl)
,-+
CD
X
""O
CD
::::s
en
CD
en
0
,-+
CD
:::s
::::;
3
::::s 3
Q)
Q)
,-+
::::s
0
cc
Q)
::::s c.. cc
~....,
Q)
-<
Cl)
-<
0
,-+
,-+
C:
CD
CD
::::; ::::;
CD
Q)
0
.....,
Cl)
::c
CD
0
::::s
Q)
::::s
""O
CJ)
CJ)
CD
::::s
en
CD
Cl)
0
::::s
Q)
"'C
CD
,-+
CD
3
Q)
....,
.C.
cc
::::s
Q)
Q)
,-+
C l)
cc
CJ)
CD
::::;
CD
CD
X
::::s
0
n
::::s
,-+
Q)
Cl)
,-+
0
d. CD
:::s
:::s
CD
::::s
,-+
c..
Q)
,-+
CD
0
0
,-+
3
CD
cit" cit" en
Q)
cc
Cl)
CD
r-+
CD
::::s
C')
en
en
CD
0
::::; N
......
0
-
0
::::s-
"'C
CD
3
Q)
CD
CD
c.n
CD
,-+
Cl)
n
,-+
Cl)
(h 0
,-+
CD
:::s
,-+
c..
Cl)
0
C:
3
CD
(h
00
0
c..
CD 3
c.. ::::s- .......
Cl)
- 0 ;::;:
CD
00
cc c.n
CD
, -+
Cl)
,-+
c..
d: CD
Q)
0
;-
CD
n
CD
::::;
Q)
::::s
,-+
"'C
C"' CD
CJ)
0
C"'
CD
CD
Q)
"'C
c..
I
Cl)
"'C
0
0
,-+
::::;
C"'
Q)
C")
::::s
7'
Cl)..
0
C:
C. CD
-< ·20
c:
::J
~-
0
::::s ::::s
Cl.. Q)
o en
-·
C:
en
en
•-..)
-
I'· .-.
.
-". 't~·- '
j
l~rn~
.• :· •• •'
ax
Sup pos e a ban k reports net income of $12, pret
,
net income of $15, operating revenues of $100
assets of $600, and $50 in equity capital. What is the_
•
?
bank's ROE? Tax-manageme·nt efficiency indicator
• unchanged?
' ,•'- ..i.,.
t:
6c..fir• Wh at are the principal components of ROE and
wh at does each ofthese components measure?
and an
-•6 ,Jf •Suppose a bank has an ROA of 0.80 percent
its ROE? Suppose
~ :~ •• _. equity multiplier of l 2x. What is
•·.l·· this bank's ROA falls to 0.60 percent. What size
ROE
,..,1 :_.;; equity multiplier must it have to hold its
;-¼·.
'
I
6-14.
6-15.
Expense control efficiency indicator? Asset management efficiency indicator? Funds management
efficiency indicator?
What are the most important components of ROA
and what aspects of a financial institution's performance do they reflect?
If a bank has a net interest margin of 2.50%, a noninterest mar.gin of -1.85%, and a ratio of provision
for loan losses, taxes, security gains, and extraordinary items of-0.47%, what is its ROA?
'-
the ir
To wha t diff ere nt kinds of risk are banks and
today?
fina ncia l-se rvic e competitors subjected
income
Wh at items on a bank's balance sheet and
risk expostat eme nt can be used to measure its
do these
sure? To wha t oth er fina ncia l institutions
risk measures seem to apply?
of its net
A bank rep orts tha t the tota l amount
ion, its
loans and leas es outstanding is $936 mill
capital
assets tota l $1,324 million, its equity
50 million
amounts to $110 million, and it holds $1,1
The estiin deposits, all expressed in book value.
c . . , ~ ~ •• •
e
II
a
i
1;111:1
ti
I
l ass ets and
mated mar ket values of the bank's tota
$13 0 mil lion ,
equity capital are $1,443 million and
ren tly val ued
respectively. The bank's sto ck is cur
ear nin gs of
at $60 per share with annual per -sh are
$24 3 mil lion
$2.50. Uninsured deposits am oun t to
$13 2 mil lion ,
and mon ey-m ark et bor row ing s tota l
am oun t to $43
while nonperforming loans cur ren tly
$21 mil lion in
million and the bank just cha rge d off
me asu res as
loans. Calculate as man y of the risk
you can from the fore goi ng dat a.
7-1.
· , . ,~;6. J, ·" ·~~·
.,i,.._ :\.-...
Jit:.'t:
.-,11" r.--,·~ ...~:.~•
a-·
T..j ·i•-c.•
-:1?::?i~.e- './r_i_--:.~-·;~~_, ,.;,'-\ ,~--~~- :l< . -,
,,-:'·I::.;: • .-~--2
'f •" .· ',!i!•·;-t~f~ (
._,, ~,IO.,..~·_,,,·\r"IJ]
... ,,. ~r:9:>:~,.l;'t,_,--..
r-,
What do the following terms mean: asset managen1ent? liability managemen t? funds managemen t?
; llii:Y ,)Ji A
7-2.
What factors have motivated financial institutions
to develop funds manageme nt techniques in recent
years?
_. _
_
: · : -• • , ••
,,,.,.;...
. _ , . __. _
~
4.
..~
0
...):..•;'• : . ...... .,
'
.· :,
• , , ..-~
'ic..•rillil••I,- - - -
.1£ :-tC:1,~i,~~,·!i!!;,
Concep·t Che~k., •'.; •'.
• .,.
•~- -~~/'
1111·,-,
change? Wha
use interest rates to
7-3. What forces ca
interest
cial firms face when
kinds of risk do finan
rates change?
tly forecast
so difficult to correc
7-4. What makes it ges?
interest rate chan
important to
d curve and why is it
7-5. What is the yiel
or slope?
know about its shape
hes to protect
lending institution wis
7-6. What is it that a
ents in interest rates?
from adverse movem
-!
-7:-¥:''q~r
7-7.
7-8.
dging?
What is the goal of he
interBannerville has posted
First National Bank of
s from
illion and interest cost
est revenues of $63 m
pos$42 million. If this bank
all of its borrowings of
hat is
total earning assets, w
sesses $700 million in
se the
terest margin? Suppo
First National's net in
double,
es and interest costs
bank's interest revenu
rcent.
ts increase by 50 pe
while its earning asse
net interest margin?
What will happen to its
Chapter 7
-
.--... ,; :.·- .. ;t•.,·: ...
225
7-14.
Suppose Carroll Bank and Trust reports interestsensitive assets of $570 million and interest-sensitive
liabilities of $685 million. What is the bank's dollar
interest-sensitive gap? Its relative interest-sensitive
gap and interest-sensitivity ratio?
change will occur in net interest income if interest
rates rise by one and a quarter percenta ge points?
How do you measure the dollar interest- sensitive
gap? The relative interest-s ensitive gap? What is
the interest sensitivity ratio?
7-15.
Explain the concept of weighted interest-s ensitive
gap. How can this concept aid managem ent in
measuring a financial institutio n's real interestsensitive gap risk exposure?
7-13.
Asset-Liability Management: Determining and Measuring Interest Rates and Controlling Interest-Sensitive and Duration Gaps
I C_oncept Check
.. ,.
7-9.
7-10.
7-11.
Commerce National Bank reports interest-sensitive
assets of $870 million and interest-sensitive liabilities of $625 million during the coming month. Is the
bank asset sensitive or liability sensitive? What is
likely to happen to the bank's net interest margin if
interest rates rise? If they fall?
Can you explain the concept of gap management?
When is a financial firm asset sensitive? Liability
sensitive?
7-12.
People's Savings Bank, a thrift institution, has a
cumulativ e gap for the coming year of +$135 million and interest rates are expected to fall by two
and a half percenta ge points. Can you calculate
the expected change in net interest income that
this thrift institutio n might experience? What
.......
.......
N
N
0
I
Q)
Cl)
Cl)
CD
,-+
0..
,-+
(/)
CD
"C
"C
0
CD
,-+
d'. :::r
::::,
Q)
,-+
0
Q)
0
0
Cl)
:::r
-,
ct>
Q)
::::,
;:::..·
Cl)
Cl)
,-+
(.J"1
-<
ct>
-,
Q)
0
3
d'.
Cl)
::::,
Q)
Cl)
Q)
Q)
-,
cc
::::,
ct>
CJ
<
ct>
Q)
O""
CJ
::::,
CJ
""C
cc
ct>
Cl)..
0..
Cl..
t:::
c:::
-,
...,
CJ
cu
,-+
Cl)
0
::::,
ct>
CJ
Cl)
0..
::::,
,-+
cc
::::,
cc
""C
""C
0
C:
0
Cl)
-·
::::,
0
0..
;:::..·
c:::
,-+
c:::
Cl)
ct>
Cl)
,-+
0
CJ
::::!'
o·
:]
Cl)
<Q
cu
CJ
'"t::l
::::,
0
0
::r.
::::,
ct>
0
0
cc
c::: ::::,
n cc
cc
Cl)
r-+
CJ
r-+
Cl)
•',)
0..
CJ
r-+
0
0..
-,
ct>
::::,
ct>
c:::
-,
ct>
cc
,-+
:::r
0..
-,
-<
Cl)
-<
0
0
ct>
3
::::,
c:::
Cl)
-<
CJ
::::,
CJ
,,
0
Q)
0..
n=
CD
=
::::!'.
::::,
Q)
-
0
CJ
::::,
cc
CJ
CJ
-
:::r
CJ
<
ct>
-~
CJ
•',)
ct>
c::
(ti
Q)
0
C)
"
Cl..
n
"C
Q)
-,
ct>
::::,
ct>
::,
<
::::,
c:::
d'.
3
CD
0..
N
w
a,
CD
Cl)
Cl)
:]
cc
CJ
-<
0
Q)
0
•',)
Cl)
•',)
,-+
:::r
Q)
,-+
-
-<
< 3
ct>
Q)
::;.;
;:::..·
Cl)
::::,
0
::::,
Q)
-
0
c:::
::::,
0..
-<
::::,
:::r
Q)
,-+
;:::..·
Q)
;:::..·
-·
""C
3
;::::;: :::r
Cl)
ct>
-<
Cl)
n
c:r
;:::..:
r-+
Q)
::::,
c:::
,-+
3
::::,
-,
I
Cl)
0
,-+
Q)
I
CD
::::,
c:::
Q)
Q)
-,
CD
CD
-<
0
"C
,-+
Q)
,-+
a,
::c
0..
CD
CD
-,
:::r
CD
Cl)
,-+
::::,
Q)
ct>
"C
:::r -<
ct>
0
-,
Q)
cc
Q)
Cl)
Cl)
CD
n
0
:::r
Q)
::::,
,-+
,-+
N
C"')
,-+
Q)
,-+
d'.
::,
-,
CD
n
Q)
r-+
Q)
Cl)
•',)
::,
,-+
0
Q)
Q)
3 -<
Cl)
"C
Cl)
c:::
-,
:::r
Q)
........
00
::c
0..
c:::
-,
I
I
I
I
c.o
Q)
:::r ::,
c:::
- --
.......
I
....... .......
.......
-...J
I
N
-
0
<
Q)
Q)
C:
0..
ct>
ct>
0
n
::,
ct>
::,
::,
,-+
:::r
ct>
(/)
~-
,-+
CD
-,
CD
Q)
,-+
00 ;:::..·
:::r (/)
..i:::,. -<
c:::
ct>
00
,-+
::::,
-,
Cl)
,-+
,-+
0
00
"C
ct>
-,
n
en
CD
-,
0-
,-+
CD
en
•',)
Cl)
ct>
ct>
0)
,-+
0
ct>
-,
,-+
""C
""C
::,
Q)
Q)
,-+
::,
,-+
CD
-,
ct>
en
,-+
-,
::,
7"'
ct>
en.. :::r en
Q)
,-+
0
:::r
Q)
en
0)
,-+
-·
:::r
Q)
"C
"C
CD
::J
,-+
--.
0
(./')
,-+
CD
C
;:::::;:
:::,CD
3
-·
:::r 0::,
Q)
,-+
::,
CD
(.J"1
CD
-,
CD
-
:::r
CD
--.
~en
Q)
Cl)
en
CD
,-+
Cl)
,-+
0
,-+
Q)
00
c.J'1
.......
("')
N
CD
::J
3
,-+
OJ
:::,
a.
c:::
-,
Q)
Cl)
Cl)
,-+
0..
d'. c:::
-,
0
::,
Q)
-- -
0
d'.
0
::,
0
-
0
:::,
-<
ct>
Q)
-,
en
,-+
en
(/)
d'.
ct>
-· .......
w
(.J"1
ct>
-.J
"C
0..
CJ
N
(.J"1
-<
CD
Q)
-,
en
Q)
Q)
,-+
ct>
-,
:::r d'.
0
0..
<
cc
Q)
Cl)
,-+
ct>
c:::
::::,
Q)
""C
--
CD
en
CJ
3
Q)
::,
~:
::::,
Cl)
,-+
CJ
::,
ct>
-,
Cl)
ct>
cc
Q)
Q)
::,
0..
=;i
C:
Cl)
,-+
C"')
0
3
ct>
,-+
Cl)
,-+
-,
0
:::r
•',)
CJ
,-+
ct>
Cl)
-,
Cl)
ct>
0)
::::,
c.c
CJ
,-+
CJ
en
CJ
0)
0)
<
CD
-0
-0
CD
,-+
OJ
c::r co
,-+
,-+
0
I
-
co
Q)
<
ct>
::,
:::n
n
Q)
:::,
0
c:::
-,
O")
0
d'.
3
-
0
::::,
CJ
::,
0
::::,
-
0
w
0
-<
ct>
0..
,-+
0
,-+
Q)
-,
-
Cl)
::,
CJ
ct>
<
CJ
0-
Q)
d'.
;::+'
-
:::r
,-+
ct>
-,
ct>
I
CJ
0..
en
:::r ,-+
CD
Q)
00
Q)
C:
0
C:
:::,
0..
:::r cc
:::r
<
CD
-,
;:::..·
:::r
OJ
•',)
-
0
(.J"1
ct>
0
::, "C
0.. Q)
Q)
::,
0- Q) -<
::,
,-+:
0
ct>
CD
0..
0..
C:
-
OJ
ct>
Cl)
0
00
..i:::,.
O")
-.J
3
-
0
:::,
,-+
:::r
ct>
,-+
:::r
-,
0
0..
en
,-+
0
,-+
0)
Q)
(./')
(./')
co
,-+
(./')
,.,
\ l l lVl) ,
problems
and Projects
eflcel
eJ[cel
e]!cel
L1l
lllctuagement, 226
1. A government bond .
nine ye
h
.
ts currently selling for $900 and pays $ 75 per year in interest for
ars w en it mat
If h
· ·
yield to
. .
ures. t e redemption value of this bond is $1,000, wh at 1s
its
inatunty if purchased today for $900?
2. Suppose the gove
b
.
rnment
then t h e savings • · . ond described in Problem 1 above is held for three years and
.
inst itution acquiring the bond decides to sell it at a price of $1,020.
C an you f1gure
out the
• h
average annual yield the savings institution w1·11 h ave earned £or
its t ree--year investment in the bond?
3
• U.S.1reasury bills are available for purchase this week at the following prices (based
upon lOO par value) and with the indicated maturities:
a. $98.25, 182 days
b. $97 .25, 2 70 days
c. $99.25, 91 days
Calculate the bank discount rate (DR) on each bill if it is held to maturity. What is the
equivalent yield to maturity (sometimes called the bond--equivalent or coupon--equivalent
yield) on each of these Treasury bills?
eXcel
el(cel
4. The First State Bank of Gregsville reports a net interest margin of 2.5 percent in its
most recent financial report, with total interest revenue of $88 million and total inter-est costs of $72 million. What volume of earning assets must the bank hold? Suppose
the bank's interest revenues rise by 8 percent and its interest costs and earning assets
increase 9 percent. What will happen to Gregsville's net interest margin?
5. If a bank's net interest margin, which was 2.50 percent, increases 70 percent and it~
total assets, which stood originally at $545 million, rise by 40 percent, what change wil
occur in the bank's net interest income?
238 Part Three
e]{cef
eXce l
A •• -
, : _l.
n.»et-Liao
iu M
ry a~nent Techniques and Hedging Against Risk
The cumulative interest rate gap of Gemstone Federal Savings and L_oan increases 60
percent from an initial figure of $40 million. If market inter~st ra~es n~e ?Y 25 ~ercent
~rom an initial level of 6 percent, what changes will occur m this thnft s net interest
mcome?
7. Old Misers State Bank has recorded the following financial data for the past three years
(dollars in millions):
6.
Interest revenues
Interest expenses
Loans (excluding nonperforming loans)
Investments
Total deposits
Money market borrowings
eXce l
Current Year
Previous Year
Two Years Ago
$ 88.00
$ 84.00
77.00
400.00
197.00
472.00
118.00
$ 80.00
74.00
390.00
174.00
467.00
96.00
79.00
415.00
239.00
487.00
143.00
What has been happening to the bank's net interest margin? What do you think caused
the changes you have observed? Do you have any recommendations for Old Misers'
management team?
8. The First National Bank of Sylvania finds that its asset and liability portfolio contains
the following distribution of maturities and repricing opportunities:
Dollar Volume of Assets and Liabilities Maturing or Subject to Repricing Within:
Coming Week
Loans
Securities
Interest-sensitive assets
Transaction deposits
lime accounts
Money market borrowings
Interest-sensitive liabilities
eel
Next 8-30 Days
Next 31-90 Days
More than
90 Days
$210.00
30.00
$100.00
20.00
$175.00
30.00
$225.00
• 25.00
$250.00
100.00
36.00
$ 0.00.
$ 0.00
84.00
20.00
. $ 0.00
196.00
0.00
100.00 0.00
1
:_
When and by how much is the bank exposed to interest rate risk? For each maturity or
repricing interval, what changes in interest rates will be beneficial to the bank and
which will be damaging, given its current portfolio position?
9. First National Bank of Fluffy Clouds currently has the following interest,sensitive assets
and liabilities on its balance sheet with the interest--rate sensitivity weights noted.
Interest-Sensitive Assets
Federal fund loans
Security holdings
Loans and leases
Interest-Sensitive Liabilities
Interest-bearing deposits
Money-market borrowings
$Amount
Rate Sensitivity Index
$ 50.00
50.00
230.00
1.15
1.35
$Amount
Rate Sensitivity Index
$250.00
85.00
0.79
0.98
1.00
Assec,Uabiliry Management: Detenru .
Chapter 7
rung and Measuring Interest
.
ruue.s and Controlling lnrcrt.sr,Sensiri,ie and Duranon Gaps
D _.
239
What is the bank•s current int
e}!cel
eJ{cel
.
..
us mter estvario
these
for
sting
Adju
gap?
t1ve
sens1
erestrate sensitivity we· h h
interest-sensitive gap? Suppose the
federal funds inte •g ts w ~tis the bank's weighted
point. How will the
bank's net interest~est0rate increases or decreases one percentage
current balance sheet ~-a~eu~ and (bl
reflecting its wei gh: : ~ be affected(~) given its
mdexes.
ance sheet adJusted for the foregoing rate..sens1ttv1ty .
.
10. Mou ntain S avmg
.
h
.
s Assoc.
top
mteres~..
•~ti?n as mterest..sensitive assets of $300 million,
sensitive liabilities of$
175 million, and total assets of $500 million. Wha t is the bank s
..
p?
.
dolla r interest
. Mountaintop's relative interest..sens1. uve
gap7 Wh 1s
ga •
..Isensiftive
at
•
.
.
v
the
is
at
Wh
,
O
tive or liability sensi
.
ha ue •ts interest sensi.tivity ratio? Is it asset sensi
.
tive7 Und
.
r
erw atsce n •
nenc e a gain
•
ano mr market interest rates will Mountaintop expe
.
in net int
.
l
A
1
e
erest incom
• oss m net interest income?
..
d
11 C · M
T.
d
a
nttes
nts
secu
ercha
an
loans
of
• as10
olio
portf
a
has
,
N.A.
,
n irust Bank
d
ex
s:
pecte to generate cash inflows for the bank as follow
Expected Cash Inflows of
Principal and Interest Payments
$1,385,421
746,872
341,555
62,482
9,871
Annual Period in Which Cash
Receipts Are Expected
Current year
Two years from today
Three years from today
Four years from today
Five years from today
cted to require the following cash
DepoSits and money market borrowings are expe
outflows:
Expected Cash Outflows of
Principal and Interest Payments
$1,427,886
831,454
123,897
1,005
Annual Period during Which Cash
Payments Must Be Made
Current year
Two years from today
Three years from today
Four years from today
Five years from today
is 8 percent, what is the dura-deposits and money market bar-tion of Casio's portfolio of earning assets and of its
ns, assuming all othe r factors are
rowings? Wha t will happen to the bank's total retur
fall? Give n the size of the dura tion
held constant, if interest rates rise? If interest rates
ld Casio engage? Please be spe..
gap you have calculated, in what type of hedging shou
and their expected effects.
cific about the hedging transactions that are needed
Problem 11 for Casio Merc hants and
12. Give n the cash inflow and outflow figures in
n at a level of 8 perc ent and then
Trust Bank, N.A., suppose that interest rates bega
of $125 rn,illion, and total lia-suddenly, rise to 9 percent. If the bank has total assets
of Casio's net wort h chan ge as
bilities of $110 million, by how much would the value
on the othe r hand, that inter est
a result of this movement in interest rates? Suppose,
ens to the value of Casio's net
rates decline from 8 percent to 7 percent. Wha t happ
it change? Wha t is the size of its
worth in this case and by how much in dollars does
duration gap?
If the discount rate applicable to the previous cash flows
eX cel
240
Part Three
eJ[ce l
Keel
('eel
reel
Asset-Liability Managemen t Techniques and Hedging Against Risk
. •on reports
13. Watson Thrift Associati
an average asse t d u ration of 5 years .and
. an average
liability duration of 4.25 years. In its latest financial report, th~ associatio n recorded
rates began at
tota I assets o f$186
. 1·11·ion and t o t a l ti·abi'li"ties of $1.5 billion. If interest
· h
l
. b d t O 9 percent what change wt•11 occur 1n
t e va ue
7 percent and th en sudd en ly c l1m
e
'
h
·
f
·
d
f
,v,
o f w atson ,s net worth?. By h ow much w ould Watson's net worth c ange 1 , 1nstea o
ns1ng, interest rates fell from 7 percent to 5 percent?
.
.
14. A bank holds a bond in its investme nt portfolio whose duration ts 13 •5 years. Its cur· 1s
· $1 ,020 . Wh'l
ket interest rates are currently at 8 percent for
rent market pnce
1 e mar
.
d
• • t est rates to 7 .25 percent 1s expecte
comparab le quality securities , a d ecrease tn
in er
. h' b d'
.
in the coming weeks. What change ( in percentag e terms) wt 11 t ts on s pnce experience if market interest rates change as anticipat ed?
·
b k'
·h d
total
15. A savings
an s we1g
te average asse t duration is seven years. Its
h d ll liabilities
• h amount
d
to $900 million while its assets total 1 billion dollars. What is t e O ar--wetg te d uration of the bank's liability portfolio if it has a zero leverage--adjusted duration gap?
16. New Phase National Bank holds assets and liabilities whose average duration s and dol-lar amounts are as shown in this table:
Asset and Liability Items
Investment-grade bonds
Commercial loans
Consumer loans
Deposits
Nondepos it borrowings
e/
~,
Avg. Duration (years)
Dollar Amount (millions)
10.00
4.00
7.00
1.10
0.10
$ 50.00
400.00
250.00
600.00
20.00
What is the weighted--average duration of New Phase's asset portfolio and liability
portfolio? What is its leverage--adjusted duration gap?
17. A governm ent bond ~urrently carries a yield to m:aturity of 8 percent and a market
price of $1,080. If the bond promises to pay $100 in interest annually for five years,
what is its current duration?
18. Dewey Nationa l Bank holds $15 million in governm ent bonds having a duration of six
years. If interest rates suddenly rise from 6 percent to 7 percent, what percenta ge
change should occur in the bonds' market price?
-
Internet Exercises
1. At www.ALMprofessional.com you will find a network devoted to articles and discus-sions of the asset--liability managem ent field. Visit the site and find an article entitled :
"Princip les for the Manage ment of Interest Rate Risk." What are the major sources of
interest rate risk accordin g to this article?
2. If a new model applying ALM techniqu es to a bank's risk exposur e is develop ed, you
~ould most likely find a discussio n of that new ALM model at www.A LMpro fes,
s1onal.com. What models are presentl y found at this Web site?
3. If you wan~ to find a ~se~ul definitio~ for duration, use a search engine to explore the
Web. Provide one definitio n of duration and the Web site where it was found.
4. See if you can find the meaning of modified duration on the Web. Where did you find it
and what did you find?
I'
\
\