Use the following information about a hypothetical government security dealer na

Question

Use the following information about a hypothetical government security dealer named J.P. Groman. (Market yields are in parentheses; amounts are in millions.) What is the reprising or funding gap if the planning period is 30 days? 91 days? 2 years? (Recall that cash is a noninterest-earning asset.) (Enter your answers in millions. Negative amounts should be indicated by a minus sign.) What is the impact over the next 30 days on net interest income if all interest rates rise by 70 basis points? (Input the amount as a positive value.) If runoffs are considered. it the effect on net riterest income at year-end nee by 70 basis points? (Input the amount as a positive value.)

Explanation / Answer

Assets Liabilities and Equity

Cash $12 Overnight repos $172

1-month T-bills (7.07%) 79 Subordinated debt

3-month T-bills (7.27%) 75 7-year fixed rate (8.57%) 152

2-year T-notes (7.52%) 52

8-year T-notes (8.98%) 102

5-year munis (floating rate)

(8.22% reset every 6 months) 27 Equity 15

Total assets $351 Total liabilities & equity $351

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.

Repricing gap using a 30-day planning period = $79 - $172= -$93 million.Repricing gap

using a 3-month planning period = ($79 + $79) - $172 = -$14 million.

Reprising gap using a 2-year planning period = ($79 + $79 + $52 + $27) - $172 = +$65

million.

b. What is the impact over the next 30 days on net interest income if interest rates increase

70 basis points?

If interest rates increase 70 basis points, net interest income will decrease by $475,000.

%u2206NII = CGAP(%u2206R) = -$93m.(.007) = -$0.651m.or 651000

c.Funding or repricing gap over the 1 year planning period=(79+79+12+22+27)-172=$47m

d.Net interest income will increase by651000. that is n%u2206NII = CGAP(%u2206R)=47 m(0.007)=$0.329m

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