Question

The managers of Happy Bank ask for a performance/risk analysis, and ask you to answer the following questions.   

Happy Bank’s balance sheet is as follows:

Assets:                                                                           Ave. Duration                   

Securities              4% rate            $300 million                1 year

Long-term Loans 7% rate           $ 900 million                5 years

      Total Assets                             $1,200 million

Liabilities & Equity

Short-term Deposits 2% rate       $600 million               1 year

Certificates of Deposit 3% rate      400 million               5 year

      Total Liabilities                       $1,000  million

Equity                                                 200 million   

Total Liab.& Equity                     $1,200 million

1. What is the bank’s expected net interest income $ (NII) and expected net interest margin (NIM)? [Hint: NII = Sum (Each asset x its rate) – Sum (Each liability x its rate)]

and NIM = NII / Earning Total Assets (excludes cash)

NII ($’s) =

2. If the bank has the NIM % that you calculated above, a PLL% of 1.00%, and a Burden % of 1.50%, what is the bank’s operating ROA before taxes (NIM – Burden% - PLL%)?   Operating ROA (OROA) =

   

c.What is the equity multiplier (EM) for the bank? (hint EM = total assets/equity)

EM =

d.  Using this equity multiplier, what is the bank’s Operating ROE?  

(hint OROE = OROA x EM)    Operating ROE =

e. What is the bank’s 1-year income (funding) gap (Rate Sensitive Assets (RSA) for 1 year – Rate Sensitive Liabilities (RSL) for 1 year? Funding Gap ____________

f.  Given this funding gap if rates go up by 1%, what is the expected change in the bank’s NII $?   [Hint: Change NII $ = Funding Gap x Change Rate]

          Expected Change in NII _______________

g.   What is the Bank’s Duration gap (D-Gap)?

    D-GAP = Duration of Assets – {[Total Liabs./Total Assets] x Duration Liabs.}

          Hint: Duration of Assets = Sum {[Each type of asset / Total Assets] x its Duration}

           Duration of Liabilities = Sum {[Each type of Liability / Total Liabs.] x its Duration}

         Duration of Assets __________

         Duration of Liabilities ______________     Duration Gap _____________

h. What is the expected % change in the value of equity with a rise in rates of 1%?   Expected Change in Value of Equity = - D-GAP x {[(Chg rate / (1+ Ave loan rate)]  

***(Use 7% as the average loan rate).

Expected % Chg in the Value of the Bank’s Equity ___________

Answer 1

Your question has been answered in handwritten notes as follows: