Question

For a typical bank with more rate-sensitive liabilities than assets, the use of floating-rate loans is beneficial for all but which of the follow reasons?

A interest rate risk is transformed into credit risk

B less need for other measures such as interest rate swaps, simplifying operations

C overall bank interest rate risk is lowered, resulting in better inrerest rate stress test results

D net interest margin does not fall as much when rates rise, helping maintain Net Income

Answer #1

Assume bank a has a 5 percent tier 1 leverage ratio and a large
percentage of assets are invested in treasury securities. Bank B
has an 8 percent Tier 1 leverage ratio and a large percentage of
assets are invested in consumer debt. How would Bank A compare to
Bank B base on the capital and asset quality criteria of the CAMELS
system?
a- Bank A is safer based on both criteria
b- Bank B is safer based on both...

Bank A has risk-sensitive assets of $16 million and
rate-sensitive liabilities of $20 million. Bank B has risk
sensitive assets of $2 million, and rate-sensitive liabilities of
$4 million. Calculate the GAP measure most relevant, and state
which bank has the least amount of interest rate risk.

Suppose that you manage a bank that has made many loans at a
fixed interest rate. You are worried that inflation might rise and
the value of the loans will decline.
a. Why would an increase in inflation cause the value of your
fixed rate loans to decline?
b. How might you use swaps to reduce your risk?

1.
Suppose Bank A has $40 million in rate-sensitive assets, $70
million in fixed rate assets, $70 million in rate sensitive
liabilities, and $40 million in fixed rate liabilities and equity
capital. (10 points)
a. What is the value of the bank’s
GAP?
b. Calculate the change in Bank A’s
profit as a result of a decrease in market interest rates of 3
percentage points.
c. Calculate the change in
Bank A’s profit as a result of an increase in...

Consider the following income statement for WatchoverU Savings
Inc. (in millions):
Assets
Liabilities
Floating-rate
mortgages
(currently 14% annually)
$
68
NOW accounts
(currently 10% annually)
$
88
30-year fixed-rate
loans
(currently 11% annually)
68
Time deposits
(currently 10% annually)
38
Equity
10
Total
$
136
$
136
a.
What is WatchoverU’s expected net interest income at year-end?
(Do not round intermediate calculations. Enter your answer
in millions rounded to 2 decimal places. (e.g.,
32.16))
Net interest
income
$ million
b.
What...

Consider the following income statement for WatchoverU Savings
Inc. (in millions):
Assets
Liabilities
Floating-rate mortgages
(currently 14% annually)
$
56
NOW
accounts
(currently 10% annually)
$
76
30-year fixed-rate loans
(currently 11% annually)
56
Time
deposits
(currently 10% annually)
24
Equity
12
Total
$
112
$
112
a.
What is WatchoverU’s expected net interest income at year-end?
(Do not round intermediate calculations. Enter your answer
in millions rounded to 2 decimal places. (e.g.,
32.16))
Net
interest income
$
million
b....

The bank balance sheet below lists the categories of assets and
liabilities, along with the total amount of each
category, and the amount in each category that is "interest rate
sensitive" or repriced within one year.
Calculate the existing Dollar Gap for the bank. Next, calculate the
effect (change) on this bank's Net Interest
Income if interest rates fall or decrease by 0.50 percentage points
or 50 bp. "%" denotes either the current
interest rate earned earned or paid on...

The bank balance sheet below lists the categories of assets and
liabilities, along with the total amount of each
category, and the amount in each category that is "interest rate
sensitive" or repriced within one year.
Calculate the existing Dollar Gap for the bank. Next, calculate the
effect (change) on this bank's Net Interest
Income if interest rates fall or decrease by 1 percentage point or
100 bp. "%" denotes either the current
interest rate earned earned or paid on...

19-1
Consider the following income statement for WatchoverU Savings
Inc. (in millions):
Assets
Liabilities
Floating-rate
mortgages
(currently 12% annually)
$
58
NOW accounts
(currently 8% annually)
$
78
30-year fixed-rate
loans
(currently 9% annually)
58
Time deposits
(currently 8% annually)
24
Equity
14
Total
$
116
$
116
a.
What is WatchoverU’s expected net interest income at year-end?
(Do not round intermediate calculations. Enter your answer
in millions rounded to 2 decimal places. (e.g.,
32.16))
Net interest
income
$ million
b....

Consider the following balance
sheet for Watchover Savings, Inc. (in millions):
Assets
Liabilities and Equity
Floating-rate
mortgages
(currently 13% p.a.)
$
88
Now deposits
(currently 9% p.a.)
$
125
30-year fixed-rate
loans
(currently 10% p.a.)
110
5-year time
deposits
(currently 9% p.a.)
32
Equity
41
Total
$
198
Total
$
198
a.
What is Watchover’s expected net interest income at year-end?
(Enter your answer in millions rounded to 2 decimal places.
(e.g., 32.16))
Net interest
income
$ million
b.
What...

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