Use the following balance sheet (in millions of dollars) for a bank and assume that 20% of fixed-rate mortgages, 10 % of checkable deposits, and 10% of savings deposits are rate-sensitive. Assume all variable-rate mortgages are rate-sensitive. DUR stands for duration.
Assets Liabilities (and capital)
Reserves 15 DUR = 0 Checkable deposits 125 DUR = 1.5
Securities
<1 year 35 DUR = .3 Savings deposits 50 DUR = 2.5
>1 year 70 DUR = 2 CDs
Mortgages < 1 year 70 DUR = .5
Variable-rate 20 DUR = .5 > 1 year 60 DUR = 1.5
Fixed-rate 75 DUR = 4 Borrowings
Commercial loans
< 1 year 25 DUR = .25 < 1 year 45 DUR = .8
Capital 20 > 1 year 90 DUR = 1.75
Total assets 350 Total liabilities plus capital 350
Consider assets and liabilities of less than a year to maturity to be rate-sensitive (one-year maturity bucket).
Calculate the repricing (funding) gap for a one-year maturity bucket.
Calculate the change in net interest income in the first year for a decrease in interest rate from 5% to 4% (be sure to note whether income increases or decreases).
Calculate the average duration of assets.
Calculate the average duration of liabilities.
Calculate the leverage-adjusted duration gap.
Calculate the change in net worth (capital) if the interest rate decreases from 5% to 4%?