24*. County Bank has the following market value balance sheet (in millions, all interest at annual...
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24*. County Bank has the following market value balance sheet(in millions, all interest at annual rates). All securities areselling at par equal to book value.
Assets Liabilities and equity
$ $
Cash 20 Demand deposits 100
15-year commercial loan at 10% interest, balloon payment 160 5-yearCDs at 6% interest, balloon payment 210
30-year mortgages at 8% interest, balloon payment 300 20-yeardebentures at 7% interest, balloon payment 120
Equity 50
Total assets 480 Total liabilities and equity 480
(a) What is the maturity gap for County Bank?
(b) What will be the maturity gap if the interest rates on allassets and liabilities increase by 1 per cent?
(c) What will happen to the market value of the equity?
25*. If a bank manager is certain that interest rates were going toincrease within the next six months, how should the bank manageradjust the bank's maturity gap to take advantage of thisanticipated increase? What if the manager believes rates will fall?Would your suggested adjustments be difficult or easy toachieve?
24*. County Bank has the following market value balance sheet(in millions, all interest at annual rates). All securities areselling at par equal to book value.
Assets Liabilities and equity
$ $
Cash 20 Demand deposits 100
15-year commercial loan at 10% interest, balloon payment 160 5-yearCDs at 6% interest, balloon payment 210
30-year mortgages at 8% interest, balloon payment 300 20-yeardebentures at 7% interest, balloon payment 120
Equity 50
Total assets 480 Total liabilities and equity 480
(a) What is the maturity gap for County Bank?
(b) What will be the maturity gap if the interest rates on allassets and liabilities increase by 1 per cent?
(c) What will happen to the market value of the equity?
25*. If a bank manager is certain that interest rates were going toincrease within the next six months, how should the bank manageradjust the bank's maturity gap to take advantage of thisanticipated increase? What if the manager believes rates will fall?Would your suggested adjustments be difficult or easy toachieve?
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