Home assignment (problem oriented)-2 solution FIN 403 1. Suppose Carroll Bank and Trust reports interest-sensitive 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 interestsensitivity ratio? 2. The cumulative interest-rate gap of Jamestown Savings Bank increases 75 percent from an initial figure of $22 million. If market interest rates rise by 25 percent from an initial level of 4.5 percent, what change will occur in this thrift’s net interest income? 3. 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? 4. If a credit union’s net interest margin, which was 2.50 percent, increases 15 percent and its total assets, which stood originally at $625 million, rise by 20 percent, what change will occur in the bank's net interest income? 5. Twinkle Savings Association has interest-sensitive assets of $325 million, interest-sensitive liabilities of $325 million, and total assets of $500 million. What is the bank’s dollar interest-sensitive gap? What is Twinkle’s relative interest-sensitive gap? What is the value of its interest-sensitivity ratio? Is it asset sensitive or liability sensitive? Under what scenario for market interest rates will Twinkle experience a gain in net interest income? A loss in net interest income? 6. First National Bank of Bannerville has posted interest revenues of $63 million and interest costs from all of its borrowings of $42 million. If this bank possesses $700 million in total earning assets, what is First National’s net interest margin? Suppose the bank’s interest revenues and interest costs double, while its earning assets increase by 50 percent. What will happen to its net interest margin? 7. Peoples’ Savings Bank has a cumulative gap for the coming year of + $135 million and interest rates are expected to fall by two and a half percentage points. Can you calculate the expected change in net interest income that this thrift institution might experience? What change will occur in net interest income if interest rates rise by one and a quarter percentage points? 8. Given the that Richman Bank, N.A. has average asset duration is 1.5903 years and average liability duration is 1.4075 years. Suppose that interest rates began at a level of 5 percent and then suddenly rise to 5.75 percent. If the bank has total assets of $5 billion and total liabilities of $4.5 billion, by how much would the value of Richman’s net worth changes as a result of this movement in interest rates? Suppose, on the other hand, that interest rates decline from 5 percent to 4.5 percent. What happens to the value of Richman’s net worth in this case and by how much in dollars does it change? What is the size of its duration gap? 9. Watson Thrift Association reports an average asset duration of 7 years, an average liability duration of 3.25 years. In its latest financial report, the association recorded total assets of $1.8 billion and total liabilities of $1.5 billion. If interest rates began at 6 percent and then suddenly climbed to 7.5 percent, what change will this bond’s price experience if market interest rates change as anticipated? What will change in the price of these bonds if the market interest rate falls to 5 percent? 10. A financial firm holds a bond in its investment portfolio whose duration is 13.5 years. Its current market price is $950. While market interest rates are currently at 7 percent for comparable quality securities, a decrease in interest rates to 6.75 percent is expected in the coming weeks. What changes (in percentage terms) will this bond’s price experience if market interest rates change as anticipated?
