What is the interest rate risk exposure


Response to the following problem:

Use the data provided for Gotbucks Bank, Inc., to answer this question.Gotbucks Bank, Inc. (in $ millions)

Assets                                                         Liabilities and Equity

Cash                       $ 30                               Core deposits                      $ 20
Federal funds              20                               Federal funds                         50
Loans (floating)         105                               Euro CDs                              130
Loans (fixed)             65                                 Equity                                   20
Total assets            $220                               Total liabilities  and equity      $220

Notes to the balance sheet: Currently, the fed funds rate is 8.5 percent. Variable-rate loans are priced at 4 percent over LIBOR (currently at 11 percent). Fixed-rate loans are selling at par and have five-year maturities with 12 percent interest paid annually. Core deposits are all fixed rate for two years at 8 percent paid annually. Euro CDs currently yield 9 percent.

a. What is the duration of Gotbucks Bank's (GBI) fixedrate loan portfolio if the loans are priced at par?

b. If the average duration of GBI's floating-rate loans (including fed fund assets) is .36 year, what is the duration of the bank's assets? (Note that the duration of cash is zero.)

c. What is the duration of GBI's core deposits if they are priced at par?

d. If the duration of GBI's Euro CDs and fed fund liabilities is .401 years, what is the duration of the bank's liabilities?

e. What is GBI's duration gap? What is its interest rate risk exposure? If all yields increase by 1 percent, what is the impact on the market value of GBI's equity? (That is, ?R /(1 + R )= .01 for all assets and liabilities.)

Solution Preview :

Prepared by a verified Expert
Financial Accounting: What is the interest rate risk exposure
Reference No:- TGS02098833

Now Priced at $25 (50% Discount)

Recommended (91%)

Rated (4.3/5)