Calculate the change in the bank profit

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Reference no: EM132744335

Question - (a) Crisis-free Bank started its first day of operations with $200 million in capital. It received a total of $200 million in checkable deposits. The bank makes a $100 million commercial loan and invests $90 million in shares and $100 million in Treasury bonds. Assume required reserves are 8% of deposits and all remaining assets are kept as excess reserves, write the balance sheet of Crisis-free Bank.

(b) Suppose that you are the manager of Unique National Bank, whose current balance statement is as follows:

Rate-sensitive Assets are $120 million

Fixed-rate Assets are $30 million

Rate-sensitive Liabilities are $100 million

Fixed-rate Liabilities are $20 million

Bank Capital is $30 million

(i) Use the gap analysis to calculate the change in the bank's profit if the interest rate decreases from 4% to 1%.

(ii) Suppose that the average duration of its assets is four years, while the average duration of its liabilities is three years. Use the duration analysis to calculate the approximate change of the bank's net worth as a percentage of the total original asset value if the interest rate decreases from 4% to 1%.

Reference no: EM132744335

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