Question

Question 3

The Balance Sheet of Hedge Row Bancorp (In Millions) is provided below.

Asset	Amount	Liability & Equity	Amount
Cash (Non-Interest Earning)	10.0	Demand Deposit (One-Year Maturity)	70
Short Term Consumer Loan (One-year Maturity)	140	Demand Deposit (Two-year Maturity)	40
Long Term Consumer Loan (Two-Year Maturity)	150	Three-Month Certificate of Deposits (CDs)	140
Three-Month Treasury Bills	145	Three-Month Bankers Acceptances	100
Six-Month Treasury Notes	110	Six-Months Commercial Paper	155
Five-year Treasury Bond	85	One-Year Time Deposit	195
10 Year, Fix Rate Mortgages	120	Two-Year Time Deposits	170
30-Year, floating-Rate Mortgages (Rate Adjusted every nine months)	230	Equity Capital (Fixed)	120
Total Assets	990	Total Liability & Equity	990

1. Calculate the cumulative one-year repricing gap (CGAP) for Hedge Row Bancorp.
2. Based on the answer from a) explain which risk Hedge Row Bancorp would be exposed to.
3. Calculate the Cumulative one-year impact on net interest income of Hedge Row Bancorp of a 1¼% (125 basis points) increase in interest rates on both rate sensitive assets and rate-sensitive liabilities.
4. The weighted average Duration of the assets of Hedge Row Bancorp is calculated at 3.6 years, while the weighted-average duration of it’s liabilities is calculated at 2.8 years. The market value of the liabilities equates to the book value. With interest rate expected to rise from 9% to 10%.

1. Calculate the potential impact on the market value of the equity of Hedge Row Bancorp.

Answer 1

a) Rate-sensitive assets = $(140+145+110+230) = 625 million,

Rate-sensitive liabilities = $(70+140+100+155+195) = 660 million.

Repricing gap = RSA - RSL = $625 - $660 million = -$35 million.

b)According to the CGAP effect, when CGAP is negative the change in NII is negatively related to the change in interest rates. Thus, an Hedge Row Bancorp would want its CGAP to be negative when interest rates are expected to fall.

c) ΔNII = ($-35 million)(1.25%) = -$4375 million = $-437,500

d) Potential Impact of MV of equity of Hedge Row Bancorp = 120* 1.25% =$1.5million