1.What is the repricing gap? In using this model to evaluate interest rate risk, what is meant by rate sensitivity? On what financial performance variable does the repricing model focus? Explain.
2.What is a maturity bucket in the repricing model? Why is the length of time selected for repricing assets and liabilities important when using the repricing model?
3.What is the CGAP effect? According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive? When CGAP is negative?
4.Which of the following is an appropriate change to make on a bank’s balance sheet when GAP is negative, spread is expected to remain unchanged and interest rates are expected to rise?
a. replace fixed rate loans with rate sensitive loans
b. replace marketable securities with fixed rate loans
c.replace fixed rate CDs with rate sensitive CDs
d.replace equity with demand deposits
e.replace vault cash with marketable securities
5. Consider the following balance sheet positions for a financial institution:
· Rate-sensitive assets = $200 million. Rate-sensitive liabilities = $100 million
· Rate-sensitive assets = $100 million. Rate-sensitive liabilities = $150 million
· Rate-sensitive assets = $150 million. Rate-sensitive liabilities = $140 million
a.Calculate the repricing gap and the impact on net interest income of a 1 percent increase in interest rates for each position.
b.Calculate the impact on net interest income on each of the above situations assuming a 1 percent decrease in interest rates.
c. What conclusion can you draw about the repricing model from these results?
6.What are the reasons for not including demand deposits as rate-sensitive liabilities in the repricing analysis for a commercial bank? What is the subtle but potentially strong reason for including demand deposits in the total of rate sensitive liabilities? Can the same argument be made for passbook savings accounts?
7.Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test?
8.What is the spread effect?
9.Consider the following balance sheet for WatchoverU Savings, Inc. (in millions):
Assets Liabilities and Equity
Floating-rate mortgages 1-year time deposits
(currently 10% annually) $50 (currently 6% annually) $70
(currently 7% annually) $50 (currently 7% annually) $20
Equity $10
Total assets $100 Total liabilities & equity $100
a.What is WatchoverU’s expected net interest income at year-end?
b.What will net interest income be at year-end if interest rates rise by 2 percent?
c.Using the cumulative repricing gap model, what is the expected net interest income for a 2 percent increase in interest rates?
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?
10.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 Liabilities and Equity
Cash $10 Overnight repos $170
1-month T-bills (7.05%) 75 Subordinated debt
3-month T-bills (7.25%) 75 7-year fixed rate (8.55%) 150
2-year T-notes (7.50%) 50
8-year T-notes (8.96%) 100
5-year munis (floating rate)
(8.20% reset every 6 months) 25 Equity 15
Total assets $335 Total liabilities & equity $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.
b.What is the impact over the next 30 days on net interest income if interest rates increase 50 basis points? Decrease 75 basis points?
c. The following one-year runoffs are expected: $10 million for two-year T-notes and $20 million for eight-year T-notes. What is the one-year repricing gap?
d.If runoffs are considered, what is the effect on net interest income at year-end if interest rates increase 50 basis points? Decrease 75 basis points?