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(in millions): Assets Floating-rate mortgages (currently 10% annually) 30-year fixed-rate loans (currently 7% annually) Total assets Liabilities and Equity 1-year time deposits (currently 6% annually) 3-year time deposits (currently 7% annually) Equity Total liabilities & equity

$50 $50 $100

$70 $20 $10 $100

a. What is WatchoverU’s expected net interest income at year-end? Current expected interest income: $50m(0.10) + $50m(0.07) = $8.5m. Expected interest expense: $70m(0.06) + $20m(0.07) = $5.6m. Expected net interest income: $8.5m - $5.6m = $2.9m. b. What will net interest income be at year-end if interest rates rise by 2 percent? After the 200 basis point interest rate increase, net interest income declines to: 50(0.12) + 50(0.07) - 70(0.08) - 20(.07) = $9.5m - $7.0m = $2.5m, a decline of $0.4m. c. Using the cumulative repricing gap model, what is the expected net interest income for a 2 percent increase in interest rates? Wachovia’s' repricing or funding gap is $50m - $70m = -$20m. The change in net interest income using the funding gap model is (-$20m)(0.02) = -$.4m. d. What will net interest income be at year-end if interest rates on RSAs increase by 2 percent but interest rates on RSLs increase by 1 percent? Is it reasonable for changes in interest rates on RSAs and RSLs to differ? Why? After the unequal rate increases, net interest income will be 50(0.12) + 50(0.07) - 70(0.07) 20(.07) = $9.5m - $6.3m = $3.2m, an increase of $0.3m. It is not uncommon for interest rates to adjust in an unequal manner on RSAs versus RSLs. Interest rates often do not adjust solely because of market pressures. In many cases the changes are affected by decisions of management. Thus, you can see the difference between this answer and the answer for part a. 15. Use the following information about a hypothetical government security dealer named M.P. Jorgan. Market yields are in parenthesis, and amounts are in millions. Assets Cash 1-month T-bills (7.05%) 3-month T-bills (7.25%) 2-year T-notes (7.50%) 8-year T-notes (8.96%) 5-year munis (floating rate) (8.20% reset every 6 months) Total assets Liabilities and Equity Overnight repos Subordinated debt 7-year fixed rate (8.55%)

$10 75 75 50 100 25 $335

$170 150

Equity Total liabilities & equity

15 $335

a. What is the repricing gap if the planning period is 30 days? 3 months? 2 years? Recall that cash is a non-interest-earning asset.

NII = CGAP(R) = $35m.0045) = $2. + $25m.2625m. What is the impact over the next 30 days on net interest income if interest rates increase 50 basis points? Decrease 75 basis points? If interest rates increase 50 basis points. d.000 6.0075) = $0.475 IE = $375.005) = $0.500.(0. NII = CGAP(R) = $35m.000/$1.50 390.000 = 11. Rate $375. NII = CGAP(R) = -$95m.(-0. A bank has the following balance sheet: Assets Avg. Calculate the bank’s repricing GAP and gap ratio.475m.$170 = -$20 million.0035) = $1. net interest income will decrease by $475.000 Suppose interest rates rise such that the average yield on rate-sensitive assets increases by 45 basis points and the average yield on rate-sensitive liabilities increases by 35 basis points. If runoffs are considered. What is the one-year repricing gap? The repricing gap over the 1-year planning period = ($75m. = +$35 million. net interest income will increase by $712. + $20m.000(.000. + $10m.25% 805.) .50 .(.$170 = -$95 million. Assuming the bank does not change the composition of its balance sheet.75% Fixed rate 755. NII = CGAP(R) = -$95m.$170 = +$55 million.005) = -$0.000 8.312. If interest rates decrease by 75 basis points. net interest income will decrease by $262. b. Rate Rate sensitive $550.000 $1.000 Total $1. 16. If interest rates decrease 75 basis points.000 = $175. Reprising gap using a 2-year planning period = ($75 + $75 + $50 + $25) . a. net interest income will increase by $175. what is the effect on net interest income at year-end if interest rates increase 50 basis points? Decrease 75 basis points? If interest rates increase 50 basis points. interest expense.570.000 Liabilities/Equity Rate sensitive Fixed rate Nonpaying Total Avg. Repricing GAP = $550.000(. + $75m.(-.000 Gap ratio = $175. and net interest income.0075) = -$0.75 Nonearning 265.000 7. calculate the resulting change in the bank’s interest income.500.Repricing gap using a 30-day planning period = $75 .Repricing gap using a 3-month planning period = ($75 + $75) .$375.15% b.$170m.175m.000 .570. The following one-year runoffs are expected: $10 million for two-year T-notes and $20 million for eight-year T-notes.000 7. c. II = $550.000.7125m.570.

Rate $575. a government security dealer. The CGAP affect worked to increase net interest income. A bank has the following balance sheet: Assets Avg.000 = -1.000 Gap ratio = -$25.570. The spread effect also worked to increase net interest income. worked to decrease net interest income.59% b. as spread increases.000 Suppose interest rates fall such that the average yield on rate-sensitive assets decreases by 15 basis points and the average yield on rate-sensitive liabilities decreases by 5 basis points.25% 605. interest expense.50 c.162. The spread decreased by 10 basis points. Assuming the bank does not change the composition of its balance sheet. The bank’s CGAP is negative and interest rates decreased. The result is an increase in NII. the increase in NII due to the CGAP effect was dominated by the decrease in NII due to the spread effect.75% Fixed rate 755. The balance sheet of A. The result is an increase in NII.50 = $1. Market yields are in parentheses.50) = -$537.75 Nonearning 265. The spread effect.000 7.0015) = -$825 IE = $575.NII = $2. 18.$575. on the other hand. interest income decreased by less than interest expense. The spread increased by 10 basis points.000(-.000 7. yet net interest income decreased. Rate Rate sensitive $550.000 8. calculate the resulting change in the bank’s interest income. Fredwards.000 $1. as spread decreases.570.000/$1. the CGAP was positive while interest rates increased. a.000 Liabilities/Equity Rate sensitive Fixed rate Nonpaying Total Avg. Thus. and amounts are in millions.312. so does net interest income.50 390. That is. the CGAP was negative while interest rates decreased. and net interest income. Thus.000 . CGAP = $550. G.570. so does net interest income.475 .000 6. According to the spread affect. Calculate the bank’s CGAP and gap ratio. Explain how the CGAP and spread effects influenced this decrease in net interest income.$1.50 c. . According to the spread affect. 17.000(-. is listed below.0005) = -$287. That is. interest income increased by more than interest expense.50 NII = -$825 – (-$287. Explain how the CGAP and spread effects influenced the change in net interest income. The CGAP affect worked to increase net interest income.000 Total $1.000 = -$25. In this case. II = $550.

+ $100 + $50)(. interest income increased by more than interest expense. The result is a decrease in NII. Thus. What is the impact over the next three months on net interest income if interest rates on RSAs increase 50 basis points and on RSLs increase 60 basis points? II = ($150m.)(.(. – ($2. the CGAP was negative while interest rates increased.$340 = -$40 million. What is the repricing gap if the planning period is 30 days? 3 month days? 2 years? Repricing gap using a 30-day planning period = $150 . What is the impact over the next two years on net interest income if interest rates on RSAs increase 50 basis points and on RSLs increase 75 basis points? II = ($150m. That is. + $150m.Repricing gap using a 3-month planning period = ($150 + $150) .Assets Cash 1-month T-bills (7. d.25%) 2-year T-notes (7.50%) 8-year T-notes (8.005) = $1.$340 = $110 million. Explain the difference in your answers to parts (b) and (c).0075) = $2. + $150m.55%) $340 300 Equity Total liabilities and equity 30 $670 a.21m. Repricing gap using a 2-year planning period = ($150 + $150 + $100 + $50) .54m.25m.05%) 3-month T-bills (7. That is. the CGAP affect worked to decrease net interest income.25m. IE = $340m.20% reset every 6 months) Total assets $20 150 150 100 200 50 $670 Liabilities and Equity Overnight repos Subordinated debt 7-year fixed rate (8. – ($2. Thus.005) = $2.5m.(.) = $.04m. 81010 .) = -$. For the 3-year analysis. the CGAP affect worked to increase net interest income. c.$340 = -$190 million. while the other is positive? For the 3-month analysis.5m. The result is an increase in NII. Why is one answer a negative change in NII.04m.04m. NII = $2. IE = $340m. interest income increased by less than interest expense.04m. the CGAP was positive while interest rates increased.96%) 5-year munis (floating rate) (8.006) = $2. b. NII = $1.

$43.$300.000 Liabilities/Equity Rate sensitive Fixed rate Nonpaying Total Avg. The result is an decrease in NII.807.50 NII = $11.000(.000 = -$75. Calculate the bank’s repricing GAP.50 = $12. What is the resulting change in net interest income? NIIb = ($225. That is.005 NIIa = ($225.000 6. In contrast.$44.000 . Explain how the CGAP and spread effects influenced this increase in net interest income.35% Fixed rate 550.000(. The CGAP affect worked to decrease net interest income.000 b.50.812.825 .000(.000 6. in this case.000 Suppose interest rates rise such that the average yield on rate-sensitive assets increases by 45 basis points and the average yield on rate-sensitive liabilities increases by 35 basis points.19.000(.005 = -$37.000 $895. Repricing GAP = $225.000 4.0035) + $505. 81111 .000(.0425 + .0635 + .857.000(. calculate the net interest income for the bank before and after the interest rate changes.967.55 Nonearning 120.0045) +$550. the spread effect worked to increase net interest income.000 Total $895.0615)) = $55.0425) + $505.000(. However.000 7. so does net interest income. A bank has the following balance sheet: Assets Avg. According to the spread affect. Rate $300. Assuming the bank does not change the composition of its balance sheet.967. The spread increased by 10 basis points.50 = $11.0755)) – ($300.50 .15 90.25% 505. the increase in NII due to the spread effect was dominated by the decrease in NII due to the CGAP effect.000(. the CGAP was negative while interest rates increased.0635) +$550.0615)) = $56.$12. interest income increased by more than interest expense. Rate Rate sensitive $225. as spread increases.0755)) – ($300. Thus. a.5 c.

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