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Part B (worth 35% of the overall assignment mark) Table 2 presents the balance sheet of Bank B. TABLE 2 - BALANCE SHEET OF BANK B (ALL VALUES IN MM) Rates Assets Cash 3-years commercial loan 6-years treasury bond Market value 200 600 12% 8% 200 Total Assets 1,000 Liabilities and Equity 1-year time deposit 600 5% 2021S2_ASB2525/Bank Management B Assignment: 17 April 2021 Page 2 of 3 3-years bond 350 7% Equity 50 Total Liabilities and Equity 1,000 i. Calculate the weighted average duration of assets, the weighted average duration of liabilities, net interest income, net interest margin, and the DGAP of Bank B. (Hint: you will need to calculate the duration for each product first). ii. Assume that there is a parallel shift in rates by +1% (i.e. +100bps). Explain the expected impact of this parallel shift on net interest income and net interest margin given the DGAP calculated in part (B.1)? iii. Calculate the new net interest income and net interest margin given a +1% (i.e. 100 bps) parallel shifts in rates. Part C (worth 50% of the overall assignment mark) i. Explain what Bank B can do to immunise its portfolio (i.e. what changes should be made to the balance sheet described in Table B so that DGAP is approximately equal to zero). ii. Based on your explanation in C.i, calculate the new net interest income and net interest margin based on this strategy to immunise the portfolio of Bank B. Explain the impact of this immunisation strategy on net interest income and net interest margin. Part B (worth 35% of the overall assignment mark) Table 2 presents the balance sheet of Bank B. TABLE 2 - BALANCE SHEET OF BANK B (ALL VALUES IN MM) Rates Assets Cash 3-years commercial loan 6-years treasury bond Market value 200 600 12% 8% 200 Total Assets 1,000 Liabilities and Equity 1-year time deposit 600 5% 2021S2_ASB2525/Bank Management B Assignment: 17 April 2021 Page 2 of 3 3-years bond 350 7% Equity 50 Total Liabilities and Equity 1,000 i. Calculate the weighted average duration of assets, the weighted average duration of liabilities, net interest income, net interest margin, and the DGAP of Bank B. (Hint: you will need to calculate the duration for each product first). ii. Assume that there is a parallel shift in rates by +1% (i.e. +100bps). Explain the expected impact of this parallel shift on net interest income and net interest margin given the DGAP calculated in part (B.1)? iii. Calculate the new net interest income and net interest margin given a +1% (i.e. 100 bps) parallel shifts in rates. Part C (worth 50% of the overall assignment mark) i. Explain what Bank B can do to immunise its portfolio (i.e. what changes should be made to the balance sheet described in Table B so that DGAP is approximately equal to zero). ii. Based on your explanation in C.i, calculate the new net interest income and net interest margin based on this strategy to immunise the portfolio of Bank B. Explain the impact of this immunisation strategy on net interest income and net interest margin

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