What is the interest rate forecast using expectations

Assignment Help Finance Basics
Reference no: EM13910174

Jack Brothers had recently taken over the management of the securities portfolio at Community Bank & Trust, a $100 million asset-size bank in a suburb of a large U.S. city. Previously, Jack worked in the loan portfolio of a bank in another state. He had gained favorable recommendations from his prior employers in large part due to his innovative work in securitizing loans, a growing area of management in the banking industry involving the issuance of mortgage backed securities on home loans. A meeting with CEO George Willis the day before had raised some unsettling evidence concerning the gap management of the bank.

The accounting department reported that, while the dollar gap of the bank over the past year was zero, with equal dollar holdings of interest rate sensitivity of assets and liabilities, the bank had lost $500,000 in interest income over the last year as interest rates had rapidly fallen 300 basis points. Mr. Willis asked Jack to identify the "missing gap" problem that appears to exist and make recommendations in the securities portfolio that would help solve the problem. He wanted a fast turnaround on these questions, with a preliminary report due tomorrow afternoon. He also made clear that, according to investment policy, securities portfolio management was a means to effective and efficient asset/liability management. The recommendations made by Jack to Mr. Willis would be forwarded to the Asset/Liability Management Committee in order to coordinate activities in the bank.

Jack reviewed asset/liability materials that evening in his study at home and decided to go forward with a standardized gap analysis.

The short period of time allowed for the preliminary report required that only a general analysis of the problem be attempted at this stage.
In the morning he visited the accounting department staff, who helped him obtain some rough historical figures from the past year on the interest rate sensitivity of broad asset and liability accounts in response to a change of 100 basis points in the prime rate of interest.

It occurred to Jack that the rapid decline in interest rates this past year may imply that interest rates will increase in the future. Consequently, he also checked the financial newspaper in the morning and found that the two-year Treasury bond rate was 5.0 percent and the one-year Treasury rate was 4.0 percent. He estimated that approximately a 50 basis point liquidity premium likely exists in the two-year bond rate to compensate investors for the added price risk of these bonds relative to the one-year bonds.

Based on standardized gap analysis, why did the 300 basis point drop in interest rates so adversely affect the bank's net interest earnings in the past year?

How could securities management have reduced or eliminated the recent loss of $500,000?

What is the interest rate forecast using expectations and liquidity premium theories of the yield curve?

What are the implications of anticipated future interest rate movements for net interest earnings, the bank's gap position, and securities management in the near future?

Reference no: EM13910174

Questions Cloud

Ionization energy of transition elements : Explain why the first ionization energy of transition elements are of similar? Why does lithium have a much lower first ionization than helium? Arrange the atoms of Cs,Mg,N and F in order of increasing:
Estimate the after-tax project free cash flows : Estimate the after-tax (certainty-equivalent) project free cash flows for the project over its five year productive life.
Presence of hydrogen sulfide : Silver tarnishes in the presence of hydrogen sulfide (which smells like rotten eggs) and oxygen because of the following reaction: Ag + H2S + O2, Ag2S + H2O .
What is the radius and center of the circle : What is the radius and center of the circle r = -8sinθ? Convert rcosθ = 4 to rectangular coordinates. Convert 2xy = x2 + y2 to polar coordinates
What is the interest rate forecast using expectations : What are the implications of anticipated future interest rate movements for net interest earnings, the bank's gap position, and securities management in the near future?
Environmental and health hazard : Polychlorinated biphenyls (PCB) are environmental and health hazard. They break down very slowly in the environment. The decomposition of PCBs can be represented by the equation:

Reviews

Write a Review

 

Finance Basics Questions & Answers

  A one-year us treasury security has a nominal interest

a one-year u.s. treasury security has a nominal interest rate of 2.25 percent. if the expected real rate of interest

  Determine how much the fra is worth and who pays who--the

a bank sells a three against six 3000000 fra for a three-month period beginning three months from today and ending six

  Why firms in these industries would prefer

Firms in the real estate investment trusts (REITs), airlines, electric utilities, and paper products industries tend to have high leverage. Explain why firms in these industries would prefer to have high leverage.

  Computing investment to completely fund annuity in 50 years

How much would you have to invest yearly to completely fund annuity in 50 years, again suppose a 6% monthly compounding rate?

  Whats the bonds current yield

The bond pay interest annually, has a par value of $1,000, and a yield to maturity of 10.75%. What's the bonds' current yield?

  Accounts receivables to obtain an additional bank loan

Suppose you started a new business last year with $60,000 of your own amount that was used to buy equipment. Now you are seeking a $30,000 loan to finance the inventory needed to reach this year's sales target.

  One-year treasury bills currently earn 550 percent you

one-year treasury bills currently earn 5.50 percent. you expect that one year from now one-year treasury bill rates

  Compute of net asset value

Compute of Net Asset Value (NAV) of shares and Assume that you have recently purchased 100 shares in an investment company

  What is the profit or loss associated with copper

Allocate the joint costs using the relative sales values. With these costs, what is the profit or loss associated with Copper?

  Good types of debt

Consider though, the importance of a business having debts. Although most people think of debt as a bad thing, debt can also be seen as a good thing as there are good types of debt. Debt can also help build credibility and creditworthiness. Do you..

  How much would it cost to buy such an annuity today

My aunt is about to retire and she wants to buy an annuity that will supplement her income by $65,000 per for 25 years beginning a year from today. The going rate on such annuities is 6.25%. How much would it cost to buy such an annuity today?

  What is the function of a mutual fund

What is the function of a mutual fund? Why are mutual funds popular among investors? How does a money market mutual fund differ from a stock or bond mutual fund?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd