Week 5 HW

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Finance

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Feb 20, 2024

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Chapter 22 Problem 11 (page 691) 11.WallsFarther Bank has the following balance sheet (in millions of dollars): (LG 22-3) Cash inflows over the next 30 days from the FI’s performing assets are $5.5 million. Calculate the LCR for WallsFarther Bank. Answer: $53.27 (see spreadsheet) Cash $ 55,000,000 Deposits at the Fed $ 19,000,000 Treasury securities $ 125,000,000 GNMA securities $ 94,000,000 Total high-quality liquid assets $ 293,000,000 Total Net Cahs flow Outflow $ 5,500,000 LCR $ 53.27 Chapter 23 Question 4 (page 719) 4. What is the CGAP effect? According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive? When CGAP is negative? (LG 23-1) Answer: CGAP is the effect that describes the relation between changes in interest rates and changes in net interest income. When CGAP is positive, the change is net interest income is positively correlated to changes in interest rates. When CGAP is negative the change in net interest income is negatively related to change in interest rates. Problem 9 (page 720) 9. Use the data provided for Gotbucks Bank Inc. to answer this question.
Notes to the balance sheet: Currently, the fed funds rate is 8.5 percent. Variable-rate loans are priced at 4 percent over LIBOR (currently at 11 percent). Fixed-rate loans are selling at par and have five-year maturities with 12 percent interest paid annually. Core deposits are all fixed rate for two years at 8 percent paid annually. Euro CDs currently yield 9 percent. (LG 23-3) a. What is the duration of Gotbucks Bank’s (GBI) fixed-rate loan portfolio if the loans are priced at par? Answer: 3.05 (see spreadsheet) b. If the average duration of GBI’s floating-rate loans (including fed fund assets) is 0.36 year, what is the duration of the bank’s assets? (Note that the duration of cash is zero.) Answer: 1.10 (see spreadsheet) c. What is the duration of GBI’s core deposits if they are priced at par? Answer: 1.52 (see spreadsheet) d. If the duration of GBI’s Euro CDs and fed fund liabilities is 0.401 year, what is the duration of the bank’s liabilities? Answer: .513 (see spreadsheet) e. What is GBI’s duration gap? What is its interest rate risk exposure? If all yields increase by 1 percent, what is the impact on the market value of GBI’s equity? (That is, ΔR/(1 + R) = 0.01 for all assets and liabilities.) Chapter 24 Problem 9 (page 748) 9. Tree Row Bank has assets of $150 million, liabilities of $135 million, and equity of $15 million. The asset duration is six years and the duration of the liabilities is four years. Market interest rates are 10 percent. Tree Row Bank wishes to hedge the balance sheet with Treasury bond futures contracts, which currently have a price quote of $95 per $100 face value for the benchmark 20-year, 8 percent coupon bond underlying the contract, a market yield of 8.5295 percent, and a duration of 10.3725 years. (LG 24- 2, LG 24-3) a. Should the bank go short or long on the futures contracts to establish the correct macrohedge? Macro-hedge is a strategy which hedges the duration of the entire balance sheet. The bank should go short on the futures contracts to establish the correct macro-hedge because an increase in
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