PRACTICE PROBLEM - Bank Duration GAP: State Bank's balance sheet is listed below. Market yields and durations (in years) are in parenthesis, and amounts are in millions.
|
Assets
|
|
|
Liabilities and Equity
|
|
|
Cash
|
$20
|
|
Demand Deposits
|
$250
|
|
Fed Funds (5.05%, 0.02)
|
150
|
|
MMDAs (4.5%, 0.50)
|
|
|
T-bills (5.25%, 0.22)
|
300
|
|
(no minimum balance requirement)
|
360
|
|
T-bonds (7.50%, 7.55)
|
200
|
|
CDs (4.3%, 0.48)
|
715
|
|
Consumer loans (6%, 2.50)
|
900
|
|
CDs (6%, 4.45)
|
1,105
|
|
C&I loans (5.8%, 6.58)
|
475
|
|
Fed Fund (5%, 0.02)
|
515
|
|
Fixed-rate mortgages (7.85, 6.00)
|
1200
|
|
Commercial paper (5.05%, 0.45)
|
400
|
|
Variable-rate mortgages,
|
|
|
Subordinated debt:
|
|
|
repriced @ quarter (6.3%, 0.25)
|
580
|
|
Fixed-rate (7.25%, 9.65)
|
200
|
|
Premises and equipment
|
120
|
|
Total Liabilities
|
$3,545
|
|
|
|
Equity
|
400
|
|
Total assets
|
$3,945
|
|
Total Liabilities and equity
|
$3,945
|
a. What is State Bank's duration gap?
b. Use these duration values to calculate the expected changed in the value of the assets and liabilities of State Bank for the New Fed Chair Powell's predicted increase of 0.25 percent in interest rates in June 2018.
c. What is the change in equity value forecasted from the duration values for the predicted increase in interest rates of 0.25 percent?