Exam (elaborations)

Final Exam with correct answers 2024

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Course
Fina78

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Fina78

2.) Are The following assets rate sensetive within a 6 month time frame? a) Three month T bill B) Federal funds sold daily C) Two year treasury bonds with semiannual coupon payments D) Four year amortizied car loan with $350 monthyl payments including both principle and interest (for the first ...

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Uploaded on November 7, 2024
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Type Exam (elaborations)
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final exam practice questions

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Course Fina78

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Final Exam Practice Questions
2.) Are The following assets rate sensetive within a 6 month
time
a) frame?
Three month T
bill
B) Federal funds sold
daily
C) Two year treasury bonds with semiannual coupon
payments
D) Four year amortizied car loan with $350 monthyl payments including
bothinterest
and principle(for the first 6 months, principle payments
e) Commercial
total 448) loan priced at the bank's prime rate + 2% correct
answers within
matures A) Yes...it
that time
frame
B) Yes...It matures
daily
C) No...priciple is recieved after 6 months; coupon interest is not a balance ,
sheet
so iteminlcuded as either an asset or
its not
liability
d) Yes......the partial payments during the first 6 months are rate
sensitive
e) Yes or no....depends on if the prime rate changrs within 6 months. If it
does change
within 6 months, the full amount of the loan principle is rate
sensetive.
Consider the following Bank balance sheet (figures are in thousadns) and
associated
average interest rates. The time frame for rate sensitiviy is
one year:
Asset
s
RAte senseitive: 103,300 (3.3%
rate)
Fixed RAte: 161,400 (4.5%
rate)
Nonearning:
27,500
Total:
292,200
Liabilites and
Equity
Rate Sensetive: 91,600
Fixed rate: 181,850
(0.8%)
(2.1%)
Nonpaying liabilites and equity:
18,750
Total:
292,200
A) Calculate the bank's GAP, expeted NII, and NIM if interest rates and
portfolio
composition remain constant during the year. This bank is positioned to
profit move
rates if interest
in which
directoin?
B) Calculate the change in expected NII and NIM if the entire yield curve
shifts 2%
higher during the year. Is this outcome consistent with the bank's
static
C) GAP? that instead of the parallel shift in the yield curve in Part B,
Suppose
interest rates
increase unevenly. Speciically, suppose that asset yields rise by 0 correct
answers
-GAP: A)
103,300 - 91,600=
11,700;
-NII expected: 103,300 (0.033) + 161,400 (0.045) - 91,600 (0.008)
+ 181,850
(0.021)=6,120.
25;
- NIM: 6,120.25/(103,300 +161,400)=
2.31%

, - This bank is asset sensitve, so this bank with profit if rates go up.
11,700than
assets moreininliabilites will reprice at
higher
B) 11,770ratesX 0.02=234. NIM would increase to 6,354/(103,300 +
161,400)=2.40%
c) Change in interest income (103,300 X 0.005) - (91,600 X 0.0075)= 170
change in net
interest
income.
d) (103,300 X 0.0033) + (161,400 X 0.0045) - (71,600 0.008) +
(201,850 X 0.021)=
5,860.2
5.
Lsit the basic steps in static gap analysis. Whats the purpose of each?
correct
1. Developanswers
an interest rate forecast: to estimate whether specific assets and
liablitesand
reprice will if they will reprice in this
enviroment
2. Select series of sequential time intervals to put assets that
willClassify
3. repriceassets and liablites as rate sensetive or fixed rate within the
time this
with interval;
info, claculate static
GAP
4. Forecast NII given rate snestive assets and liablites and interest rate
envrioemtn
forecast. Purpose is to asses the amount and varation in
earnings.
Suppose that your bank buys a T bill yielding 4% that matures in 6 months
and purchase
the finances with a 3 month deposit paying 3%. Purhase of the T bill
is 3 million
financed with a 3 million
deposit
A) Calculate the 6 month GAP associated with this transaction. What
does the GAP
measrue indicate about the interest rate risk
transacton?
B) Calculate the 3 month GAP assocaited with this transacton. Is this a better
measruer
of GAP risk? Why or why not? correct answers A) 6 month GAP: 3-3=0
(seemingly no
GAP)
B) 0-3=-3; this indicates a negative GAP, which is consistent about the l
bank's actua
mismatch between rate sensetive assets and liablites. The issue is to
interval
select a short
time enough to capture a differnce in the repricing frequency of
assets and
liablite
s.
What is the fundamental weakness of the GAP ratio as copared with GAP as a
measure
of interest rate risk? correct answers GAP ratio ignores the size of the
bank, andno
provides thus
info on the magnitude of change in net interest income when
rates which
Also, change. bank is riskier? If in one year Bank A has RSA os $5 and RSL of
$4
gapfor a of 1.25. Bank B has RSA of 500 and RSL of 400 for a GAP ratio of
ratio
1.25. Both
banks are the same size accoridng to this measrue, but bank B's actually
way risker
(FINISH)Assume that you manage the interst rate risk positon of your bank.
Your bankhas a positive cumulative GAP for all time intervals through one
currently
year. You
expect that interest rates will fall sharply during the year and want to reduce
yourposition.
risk bank's The current yield curve is inverted with long term rates
below short term
rates
.A) To reduce risk, would you reccomend issuing a 3 month time deposit and
investing
the proceeds in one year T
bills

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