In: Accounting
Use the data provided for Gotbucks Bank, Inc., to answer this question.
Gotbucks Bank, Inc. (in $ millions)
Assets Liabilities and Equity
Cash $ 48 Core
deposits $ 43
Federal funds 38
Federal funds 68
Loans (floating) 123
Euro CDs 148
Loans (fixed) 83
Equity 33
Total assets $ 292 Total
liabilities and equity $ 292
Notes to the balance sheet: Currently, the fed funds rate is 10.3
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.
Assume that fixed rate loans are non-amortizing. Core deposits are
all fixed rate for two years at 8 percent paid annually. Euro CDs
currently yield 9 percent.
a.
What is the duration of Gotbucks Bank’s (GBI) fixed-rate loan
portfolio if the loans are priced at par? (Do not round
intermediate calculations. Round your answer to 3 decimal places.
(e.g., 32.161))
Duration
years
b.
If the average duration of GBI’s floating-rate loans (including fed
fund assets) is .54 year, what is the duration of the bank’s
assets? (Note that the duration of cash is zero.) (Do not round
intermediate calculations. Round your answer to 3 decimal places.
(e.g., 32.161))
Duration (assets)
years
c.
What is the duration of GBI’s core deposits if they are priced at
par? (Do not round intermediate calculations. Round your answer to
3 decimal places. (e.g., 32.161))
Duration (deposits)
years
d.
If the duration of GBI’s Euro CDs and fed fund liabilities is .419
years, what is the duration of the bank’s liabilities? (Do not
round intermediate calculations. Round your answer to 4 decimal
places. (e.g., 32.1616))
Duration (liabilities)
years
e-1.
What is GBI’s duration gap? (Do not round intermediate
calculations. Round your answer to 4 decimal places. (e.g.,
32.1616))
Duration gap
years
e-2.
What is the expected change in equity value if all yields increase
by 200 basis points? (Enter your answer in dollars not in millions.
Negative amount should be indicated by a minus sign. Do not round
intermediate calculations.)
Expected change in equity value $
e-3.
Given the equity change in e-2. what is the expected new market
value of equity after the interest rate change? (Enter your answer
in dollars not in millions. Negative amount should be indicated by
a minus sign. Do not round intermediate calculations.)
New market value $
a) | ||||
Loan (fixed) = Par Value | $83.00 | |||
Annual interest = Loans (fixed) x rate = $83 x 12% | $9.96 | |||
Maturity | 5 | years | ||
t | CF | PV@ 12% | PV of CF | PV of CF x t |
1 | $9.96 | $0.8929 | $8.89 | $8.89 |
2 | $9.96 | $0.7972 | $7.94 | $15.88 |
3 | $9.96 | $0.7118 | $7.09 | $21.27 |
4 | $9.96 | $0.6355 | $6.33 | $25.32 |
5 | $92.96 | $0.5674 | $52.75 | $263.74 |
$335.10 | ||||
Duration = $282.76/$74 | 4.037 | Years | ||
b) | ||||
DA = [48(0) + 38(.54) + 123(.54)+ 83(4.037)]/292 | 1.4453 | Years | ||
c) | ||||
Loan (fixed) = Par Value | $43.00 | |||
Annual interest = Loans (fixed) x rate = $43 x 8% | $3.44 | |||
Maturity | 2 | years | ||
t | CF | PV@ 8% | PV of CF | PV of CF x t |
1 | $3.44 | $0.9259 | $3.19 | $3.19 |
2 | $46.44 | $0.8573 | $39.81 | $79.63 |
$82.81 | ||||
Duration = $82.81/$43 | 1.926 | Years | ||
d) | ||||
DL = [43*(1.9126)/($68+$148+$43) + ($68+ $148) *(.419)/($68+$148+$43) = | 0.6692 | Years | ||
e) | ||||
1) GBI’s leveraged adjusted duration gap = DA - (TL - E)/TA) x DL | ||||
GBI’s leveraged adjusted duration gap = 1.45-($292 - 33/292) x .6692 | 0.8518 | years | ||
2) | ||||
ΔE = -0.8518 x $292,000,000 x (0.01) | -$2,487,211.81 | |||
Expected change in equity value = | -$2,487,211.81 | |||
3) New market value = $33,000,000 - $2,487,211.81 | $35,487,211.81 | |||