Homework from Lecture 9, covering Chapter 8 of Saunders & Cornett S&C.

Homework due date : 2015-3-16.

1.

[4 pts total] A bank X has the following balance sheet:

Assets
Rate sensitive
Fixed rate
Nonearning
Total

$575,000
730,000
265,000
$1,570,000

Avg. Rate
7.75%

Liabilities/Equity
Rate sensitive
$550,000

8.75

Fixed rate
Nonpaying
Total

630,000
390,000
$1,570,000

Avg. Rate
6.25%
7.50

Suppose interest rates fall such that the average yield on rate-sensitive assets decreases by 5 basis points and
the average yield on rate-sensitive liabilities decreases by 15 basis points.
a.

[ 1.5 pts ] Calculate the banks CGAP, gap to total asset ratio, and gap ratio.

b.

[ 1.5 pts ] Assuming the bank does not change the composition of its balance sheet, calculate the resulting
change in the banks interest income, interest expense, and net interest income.

c.

[1 pt] Explain in words why net interest income changes the way it does in this problem. Is the change
intuitive, or not ?

2.

[4.5 pts total ] The balance sheet of Bank Y, is listed below. Market yields are given in parentheses; amounts
in millions.

Assets
Cash
1-month T-bills (7.05%)
3-month T-bills (7.25%)
2-year T-notes (7.50%)
8-year T-notes (8.96%)
5-year munis (floating rate)
(8.20% reset every 6 months)
Total assets

3.

Liabilities and Equity

Overnight repos
Subordinated debt
7-year fixed rate (8.55%)

$20
150
150
100
200
50
$670

Equity
Total liabilities and equity

$340
300

30
$670

a.

[1.5 pts] What are the respective cumulative repricing gaps if the planning periods are 30 days? 3 month
days ? 2 years?

b.

[1 pt] What is the impact over the next three months on net interest income if interest rates on RSAs
increase 50 basis points and on RSLs increase 60 basis points?

c.

[1 pt] What is the impact over the next two years on net interest income if interest rates on RSAs increase
50 basis points and on RSLs increase 55 basis points?

d.

[1 pt] Explain your answers in parts (b) and (c). If rates on liabilities increase faster than rates on assets,
as in previous two cases, should net interest income ALWAYS decrease ?

[4 pts total ] (a) [2 pts] Suppose that the current one-year tenor spot rate and expected one-year tenor T-bill
rates starting 1, 2 and 3 years from today are as follows (note I am using my notation, and NOT the texts
notation).
0

R1=4%

E(1r1) =5%

E(2r1) =6%

E(3r1)=7%

Using the unbiased expectations theory, calculate the spot rates for one-, two-, three-, and four-year-maturity
Treasury securities.
(b) [2 pts] do the same thing if:
.

R1=4%

E(1r1) =4%

E(2r1) =4%

E(3r1)=4%

In other words,you dont expect the 1Y tenor rate to change in the next few years.

4.

[3 pts total] (a) [1 pts ] You are given the following spot rate curve. According to the unbiased
expectations hypothesis, what are the expected forward rates E[1r1] and E[2r1] ? [Use my notation in the
lecture notes for r, and NOT the texts. ] (b) [2 points] Give two fundamental reasons to explain why a
spot curve such as the one below can be sloped downwards, and three year rates may in fact be LESS
than 1Y rates.
Maturity
One year
Two years
Three years

Yield
3.50
3.25
3.00

5. [5 pts total] Bank Zs balance sheet is listed below. Market yields are in parenthesis, and amounts are in
millions.
Assets
Cash
Fed funds (5.05%)
3-month T-bills (5.25%)
2-year T-notes (6.50%)
8-year T-bonds (7.50%)
5-year munis (floating rate)
(8.20%, repriced @ 6 months)
6-month consumer loans (6%)
1-year consumer loans (5.8%)
5-year car loans (7%)
7-month C&I loans (5.8%)
2-year C&I loans (floating rate)
(5.15%, repriced @ 6-months)
15-year variable rate mortgages
(5.8%, repriced @ 6-months)
15-year variable rate mortgages
(6.1%, repriced @ year)
15-year fixed-rate mortgages (7.85%)
30-year variable rate mortgages
(6.3%, repriced @ quarter)
30-year variable rate mortgages
(6.4%, repriced @ month)
30-year fixed-rate mortgages (8.2%)
Premises and equipment
Total assets

$20
150
150
100
200
50
250
300
350
200
275
200
400
300

Liabilities and Equity

Demand deposits
Savings accounts (1.5%)
MMDAs (4.5%)
(no minimum balance requirement)
3-month CDs (4.2%)
6-month CDs (4.3%)
1-year CDs (4.5%)
2-year CDs (5%)
4-year CDs (5.5%)
5-year CDs (6%)
Fed funds (5%)
Overnight repos (5%)
6-month commercial paper (5.05%)
Subordinate notes:
3-year fixed rate (6.55%)
Subordinated debt:
7-year fixed rate (7.25%)
Total liabilities

100
$3,545

Equity
Total liabilities and equity

400
$3,945

$250
20
340
120
220
375
425
330
350
225
290
300
200

225
355
400
20
$3,945

a. [3 pts] What is the repricing gap if the planning period is 30 days ? 6 months ? 1 year ? In other
words, what are the respective cumulative GAPs, or CGAPS, over each of these time periods ?
CONSERVATIVELY : assume savings account are rate sensitive with a repricing period of 30 days. Also,
assume MMDAs have a repricing period of 30 days.
b. [1 pt] What is the impact over the next six months on net interest income if interest rates on RSAs increase
60 basis points and on RSLs increase 40 basis points?
c. [1 pt] What is the impact over the next year on net interest income if interest rates on RSAs increase 60 basis
points and on RSLs increase 40 basis points?
.