(15) 5. Consider the following bank balance sheet (fixed rates and pure discount
ID: 2742978 • Letter: #
Question
(15) 5. Consider the following bank balance sheet (fixed rates and pure discount securities unless indicated otherwise). Interest rates on liabilities are 10 percent and on assets are 12 percent. Duration (years) Duration Assets Liabilities and Equitym (years) Super Now Checking Accounts (rates set daily) 6-Month Certificates of Deposit 3-Year Certificates of Deposit Total Liabilites Equity (E) Prime-Rate Loans (rates set daily) 50 1.0 100 0.5 3.0 40 25 165 10 2- Year Car Loans 651.0 607.0 30-Year Mortgages Total Assets 175Explanation / Answer
Normal scenario if there is no change in the duration of any portfolio.
If bank changes mortgage values.
If duration of car loan is changed:
Disadvantages of using net worth immunization:
1. Needs continous monitoring and evalaution which needs some transaction cost.
2. Creates disadvantages to customers which may become dissatisfied and waive of the mortgage or may ask for the transfer's.
3. Some bonds are callable immediately so pay off for them is required as and when asked so it may reduce your balance.
Advantages
1.) minimizes the impact of interest rates on networth.
2.) Optimizes the portfolio and use of funds can be optimized.
3.) Wastage of funds can be reduced as well.
Interest 12% Interest 10% Assets Amount Duration Interest+principal on normal Interest rate increse Interest rate decrease Liabilties Amount Duration Interest+principal on normal Interest rate increse Interest rate decrease Prime rate loans 50 1 56 57 55 Super now checking account 100 1 110 112 108 2-year car loan 65 1 72.8 74.1 71.5 6- month CD 40 0.5 41.9523539 42.332 41.569219 30-year mortgage 60 7 132.640884 150.136127 116.923026 3-year CD 25 3 33.275 35.123 31.4928 Additional CD of 6-Month 100 0.5 104.880885 105.83 103.92305 Total 175 261.440884 281.236127 243.423026 265 290.108239 189.46 181.06202Related Questions
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