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Calculate Change In The Assets And Liabilities And Change In Interest Rates Of Bank

Question

The following information is about current spot rates for an FI’s assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.

Assets

Liabilities

1-year loan rate: 7.50 percent

1-year CD rate: 6.50 percent

2-year loan rate: 8.15 percent

2-year CD rate: 6.65 percent


1. If rates do not change, the balance sheet position that maximizes the FI's returns is

a. a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs.
b. a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans.
c. a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD.
d. a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans.
e. a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans.

2. What is the duration of the two-year loan (per $100 face value) if it is selling at par?

    a. 2.00 years.
    b. 1.92 years.
    c. 1.96 years.
    d. 1.00 year.
    e. 0.91 years.

3. If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged adjusted duration gap of this position? Use your answer to the previous question.

    a. +1.25 years.
    b. +1.12 years.
    c. –1.12 years.
    d. +0.92 years.
    e. –1.25 years.

4. Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points.
    a. –$1.756.
    b. –$1.775.
    c. +$98.24.
    d. –$1.000.
    e. +$1.924.

Summary

These short questions belong to Finance and the questions deal with a bank’s assets and liabilities with changing interest rates and duration of assets and liabilities.

Total Word Count 111

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