Question

1. Which of the following about maturity gap is true?
   1. It can be used for forecasting the change in market value of equity
   2. It takes into account the schedule of the cash flows of an asset ot a liability
   3. It focuses only on the changes in net interest income resulting from the changes in interest rates
   4. It takes into account the time value of money

2. Suppose the bank has a negative maturity gap of 2 years. If interest rates increase by 2 percentage points, the market value of equity will
   1. Increase because of the exposure to reinvestment risk
   2. Decrease because of the exposure to reinvestment risk
   3. Increase because of the exposure to refinancing risk
   4. Decrease because of the exposure to refinancing risk

3. Maturity gap is
   1. The difference between the size of assets and liabilities
   2. The difference between rate-sensitive assets and rate-sensitive liabilities
   3. The difference between duration of assets and duration of liabilities
   4. None of the above
4. Refer to the following balance sheet information:

5. Assets	amount, $ mln	Liabilities	amount, $ mln
   Cash	10	Deposits	50
   T-bills	20	CDs	20
   Loans	50	Equity	10
   	80		80

   Calculate the average maturity of assets and liabilities. (2 points)

Answer 1

1) Option C

Maturity Gap measures the interest rate risk. Using maturity gap model, one can measure the potential changes in the net interest income variable. It consider all the changes occurred in the interest income and interest expense as the various assets and liabilities are repriced.

2) Option D

Negative maturity gap is when interest-sensitive liabilities of a financial institution exceeds its interest-sensitive assets. So if there is an increase in interest rates, the market value of equity will decrease then the financial institution would face difficulty in financing its debt.

3) Option D

The maturity gap is the difference of weighted-average time to maturity of financial assets and the weighted-average time to maturity of liabilities.

4)

The average maturity of assets and liabilities is calculated by adding total amount of time until maturity of the assets or liabilities and divide by the total assets or liabilities.

For this question, we can give assign estimate maturities to the assets and liabilities in order to determine the average maturity.

For the assets, let assume the maturities as;

Cash: 3 years

T-bills= 2 years

Loans= 12 years

The asset's average maturity will be;

Assets average maturity= ($10M x 3 years) + ($20M x 2years) + ($50M x 12years)/$80M

                                       =($30M + $40M + $600M)/$80M

                                      =$670M/$80M

                                        = 8.4 years

For the liabilities, let's take the maturities as;

Deposits= 1 year

CDs= 4 years

Equity= 8 years

Liabilities average maturity= ($50M x 1 year) + ($20M x 4 years) + ($10M x 8 years)/$80M

                                            = ($50M + $80M + $80M)/$80M

                                            = $210M/$80M

                                            = 2.6 years