24*. County Bank has the following market value balance sheet (in millions, all interest at annual...

24*. County Bank has the following market value balance sheet (in millions, all interest at annual rates). All securities are selling at par equal to book value.
Assets Liabilities and equity
$ $
Cash 20 Demand deposits 100
15-year commercial loan at 10% interest, balloon payment 160 5-year CDs at 6% interest, balloon payment 210
30-year mortgages at 8% interest, balloon payment 300 20-year debentures at 7% interest, balloon payment 120
Equity 50
Total assets 480 Total liabilities and equity 480
(a) What is the maturity gap for County Bank?
(b) What will be the maturity gap if the interest rates on all assets and liabilities increase by 1 per cent?
(c) What will happen to the market value of the equity?
25*. If a bank manager is certain that interest rates were going to increase within the next six months, how should the bank manager adjust the bank's maturity gap to take advantage of this anticipated increase? What if the manager believes rates will fall? Would your suggested adjustments be difficult or easy to achieve?

Expert Solution

From the data in the question we can segregate the assets and liabilities of the bank.

Maturity gap is the difference between the weighted average time to maturity of assets and weighted average time to maturity of liabilities.

I have uploaded the image solving the same.

When the interest rate changes , the market value of the liabilities and assets that will change are reassessed and the new maturity gap is calculated accordingly. The same has also been in the image.

Answers for the remaining questions were also written legibly in the papers.

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jeff jeffy answered 7 months ago

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