The following market value (mark-to-market) balance sheet information is available for Delasho State Bank (amounts in $ thousands and duration in years):
Book Value Market Value
Assets Amount Amount Duration
T-bills $ 180 $ 180 0.50
Loans* 5,000 ______ _____
Total Assets 5,180 ______
Liabilities
Deposits 4,184 4,184 1.00
Total Liabilities 4,184 4,184
Equity 996 _______
Total Lia and NW 5,180 _______
*Since this is a simple bank, it has only one type of loan. The loan has a $5,000 book value (current outstanding principal), amortized loan with annual payments, an interest rate of 6 percent, and 20-years to maturity. Similar loans today would have an interest rate of 7 percent which is the market yield.
Using Excel, determine the market value and duration of the loan and fill in the blanks in the balance sheet above. Please include a copy of your Excel Spreadsheet with your completed exam. What is the average duration of all the assets?
Weighted Average Duration Assets:
b. What is the average duration of all the liabilities?
Weighted Average Duration Liabilities:
c. What is the leverage-adjusted duration gap? What is the interest rate risk exposure?
DG = DA - kDL =
d. What is the forecasted impact on the market value of equity caused by a relative upward shift in the entire yield curve of 1.5 percent [i.e., Dr/(1+r) = 0.0150]?
The market value of the equity will change by the following:
MVE = -DG * (A) * r/(1 + r) =
e. What variables are available to the financial institution to immunize the balance sheet? Taking one variable at a time, how much would each variable need to change to get DGAP equal to 0?
To immunize the institution for interest rate risk, the Leverage Adjusted DG needs to be zero:
DG = DA âkDL = 0
The choice is to make the duration of assets equal to:
DA =
or the duration of liabilities equal to:
DL =
Or some combination thereof.
The following market value (mark-to-market) balance sheet information is available for Delasho State Bank (amounts in $ thousands and duration in years):
Book Value Market Value
Assets Amount Amount Duration
T-bills $ 180 $ 180 0.50
Loans* 5,000 ______ _____
Total Assets 5,180 ______
Liabilities
Deposits 4,184 4,184 1.00
Total Liabilities 4,184 4,184
Equity 996 _______
Total Lia and NW 5,180 _______
*Since this is a simple bank, it has only one type of loan. The loan has a $5,000 book value (current outstanding principal), amortized loan with annual payments, an interest rate of 6 percent, and 20-years to maturity. Similar loans today would have an interest rate of 7 percent which is the market yield.
Using Excel, determine the market value and duration of the loan and fill in the blanks in the balance sheet above. Please include a copy of your Excel Spreadsheet with your completed exam. What is the average duration of all the assets?
Weighted Average Duration Assets:
b. What is the average duration of all the liabilities?
Weighted Average Duration Liabilities:
c. What is the leverage-adjusted duration gap? What is the interest rate risk exposure?
DG = DA - kDL =
d. What is the forecasted impact on the market value of equity caused by a relative upward shift in the entire yield curve of 1.5 percent [i.e., Dr/(1+r) = 0.0150]?
The market value of the equity will change by the following:
MVE = -DG * (A) * r/(1 + r) =
e. What variables are available to the financial institution to immunize the balance sheet? Taking one variable at a time, how much would each variable need to change to get DGAP equal to 0?
To immunize the institution for interest rate risk, the Leverage Adjusted DG needs to be zero:
DG = DA âkDL = 0
The choice is to make the duration of assets equal to:
DA =
or the duration of liabilities equal to:
DL =
Or some combination thereof.
