4. National Bank current balance sheet appears below. All assets and liabilities
ID: 2656629 • Letter: 4
Question
4. National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.
Assets
Amount ($ millions)
Annual Rate
Liabilities
Amount ($ millions)
Annual Rate
1-year bonds
$60
7%
1-year CD
$50
5%
10-year loan
$40
12%
2-year CD
$40
6%
Equity
$10
Total
$100
Total
$100
a. What is the weighted average maturity of assets?
b. What is the weighted average maturity of liabilities?
c. What is market value of the ten-year loan if all market interest rates increase by 2
percent?
d. What is market value of the two-year CD if all market interest rates increase by 2
percent?
e.What is the impact on the FI's equity of a 2 percent overall increase in market
interest rates on all fixed-rate instruments? Briefly discuss your results.
Assets
Amount ($ millions)
Annual Rate
Liabilities
Amount ($ millions)
Annual Rate
1-year bonds
$60
7%
1-year CD
$50
5%
10-year loan
$40
12%
2-year CD
$40
6%
Equity
$10
Total
$100
Total
$100
Explanation / Answer
Answer 1 - Weighted Average Maturity of assets
weight of 1 year bond = $60/$100 = 0.6
Weight of 10 year loan = $40/$100 = 0.4
Weighted average Maturity = (0.6*1 year) + (0.4*10 year) = 4.6 years
Answer 2 - Weighted Average maturity of Liabilities
Weight of 1 year CD = $50/$90 = 0.56
Weight of 2 year CD = $40/$90 = 0.44
Weighted Average maturity of liabilities = (0.56*1 year) + (0.44*2 year) = 1.44 years
Answer 3 - Market value of 10 year loan if all market interest rate increase by 2%
Future Value = $40000000
Number of years = 10
Rate = 12% + 2% = 14%
PMT = ($40000000*12%) = $4800000
Present Value = $35827107
Answer 4 - Market value of 2 year CD if all market Interest rate increase by 2%
Future Value = $40000000
Rate = 6% + 2% = 8%
Number of years = 2
PMT = ($40000000*6%) = $2400000
Present Value = $38573388
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