Question

Use the following information about a hypothetical government security dealer named J.P. Groman. (Market yields are in parentheses; amounts are in millions.)

Assets			Liabilities and Equity
Cash	$	19	Overnight repos	$	200
1-month T-bills (7.14%)		93	Subordinated debt
3-month T-bills (7.34%)		93	7-year fixed (8.64%)		159
2-year T-notes (7.59%)		59
8-year T-notes (9.05%)		109
5-year munis (floating rate)      (8.29% reset every six month)		34	Equity		48
Total	$	407	Total	$	407

a.	What is the repricing or funding gap if the planning period is 30 days? 91 days? 2 years? (Recall that cash is a noninterest-earning asset.) (Enter your answers in millions. Negative amounts should be indicated by a minus sign.)

	Repricing Gap
30 days	$  million
91 days	million
2 years	million

b.	What is the impact over the next 30 days on net interest income if all interest rates rise by 40 basis points? (Input the amount as a positive value.)

Net interest income will (Click to select)increasedecrease by $ .

c.	The following one-year runoffs are expected: $19 million for two-year T-notes, $29 million for the eight-year T-notes. What is the one-year repricing gap? (Enter your answer in millions.)

One-year repricing gap

$  million

d.	If runoffs are considered, what is the effect on net interest income at year-end if interest rates rise by 40 basis points? (Input the amount as a positive value.)

Net interest income will (Click to select)increasedecrease by $ .

Answer 1

         a.

         Funding or repricing gap using a 30-day planning period = 93 ? 200 = ?$107 million.

Funding gap using a 91-day planning period = (93 + 93) ? 200 = -$14 million.

         Funding gap using a two-year planning period = (93 + 93 + 59 + 34) ? 200 = +$75 million.

         b.

         Net interest income will decline by $428,000. DNII = FG(DR) = ?107(.004) = $0.428m.

        

         Funding or repricing gap over the 1-year planning period = (93 + 93 + 19 + 29 + 34) ? 200 = +$68 million.

         d.  

         Net interest income will increase by $272,000. DNII = FG(DR) = 68(0.004) = $0.272m.