Problems for Commercial Bank Management
Chapter 2 Financial Statements
2.1. Suppose that a bank holds cash in its vault of
$1.4 million, short-term government securities of $12.4
million, privately issued money market instruments of
$5.2 million, deposits at the Federal Reserve banks of
$20.1 million, cash items in the process of collection of
$0.6 million, and deposits placed with other banks of
$16.4 million. How much in primary reserves does this
bank hold? In secondary reserves?
2.2. Suppose a bank has an allowance for loan
losses of $1.25 million at the beginning of the year,
charges current income for a $250,000 provision for
loan losses, charges off worthless loans of $150,000,
and recovers $50,000 on loans previously charged off.
What will be the balance in the allowance for loan
losses at year-end?
2.3. Jasper National Bank has just submitted its Report
of Condition to the FDIC. Please fill in the missing
items from its statement shown below (all figures
in millions of dollars):
Report of Condition
$2,5
Total assets 00
Cash and due from 87
1
Depository Institutions
Securities 233
Federal Funds Sold and
Reverse Repurch. 45
Gross Loans and Leases ?
Loan Loss Allowance 200
Net Loans and Leases 1700
Trading Account Assets 20
Bank Premises and Fixed
Assets ?
Other Real Estate Owned 15
Goodwill and Other
Intangibles 200
All Other Assets 175
Total Liabilities and
Capital ?
Total Liabilities ?
Total Deposits ?
Federal Funds Purchased
and Repurchase
Agreements. 80
Trading Liabilities 10
Other Borrowed Funds 50
Subordinated Debt 480
All Other Liabilities 40
Total Equity Capital ?
Perpetual Preferred Stock 2
Common Stock 24
2
Surplus 144
Undivided Profit 70
2.4. Along with the Report of Condition submitted
above, Jasper has also prepared a Report of Income for
the FDIC. Please fill in the missing items from its
statement shown below (all figures in millions of
dollars):
Report of Income
$12
Total Interest Income 0
Total Interest Expense ?
Net Interest Income 40
Provision for Loan and
Lease Losses ?
Total Noninterest
Income 58
Fiduciary Activities 8
Service Charges on
Deposit Accounts 6
Trading Account
Gains and Fees ?
Additional
Noninterest Income 30
Total Noninterest
Expense 77
3
Salaries and Benefits ?
Premises and
Equipment Expense 10
Additional
Noninterest Expense 20
Pretax Net Operating
Income 17
Securities Gains
(Losses) 1
Applicable Income
Taxes 5
Income Before
Extraordinary Income ?
Extraordinary Gains –
Net 2
Net Income ?
2.5. If you know the following figures:
Total Interest $14 Provision for Loan
Income 0 Loss $5
Total Interest
Expenses 100Income Taxes 5
Total Noninterest Increases in bank’s
Income 15 undivided profits 6
Total Noninterest
Expenses 35
4
Please calculate these items:
Net Interest Income
Net Noninterest Income
Pretax net operating income
Net Income After Taxes
Total Operating Revenues
Total Operating Expenses
Dividends paid to Common Stockholders
2.6. The Mountain High Bank has Gross Loans of
$750 million with an ALL account of $45 million. Two
years ago the bank made a loan for $10 million to
finance the Mountain View Hotel. Two million in
principal was repaid before the borrowers defaulted on
the loan. The Loan Committee at Mountain High Bank
believes the hotel will sell at auction for $7 million and
they want to charge off the remainder immediately.
a. Net loans?
b. After charge-off, Gross Loans, ALL and Net Loans?
c. If the Mountain View Hotel sells at auction for $8
million, how with the affect the pertinent balance sheet
accounts?
2.7. You were informed that a bank’s latest income and
expense statement contained the following figures (in $
millions):
Net Interest $70
Income 0
5
Net Noninterest ($3
Income 00)
Pretax net $37
operating income 2
Security gains $10
Increases in bank’s $20
Undivided Profit 0
Suppose you also were told that the bank’s total interest
income is twice as large as its total interest expense and
its noninterest income is three-fourths of its noninterest
expense. Imagine that its provision for loan losses
equals 2 percent of its total interest income, while its
taxes generally amount to 30 percent of its net income
before income taxes. Calculate the following items for
this bank’s income and expense statement:
Total Interest Income (TII) and Total Interest
Expense(TIE):
Total Noninterest Income (TNI) and Total Noninterest
Expense(TNE):
Provision for Loan Losses
Taxes
Dividends
Chapter 3 Deposits
3.1. A bank determines from an analysis of its cost-
accounting figures that for each $500 minimum-balance
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checking account it sells account processing and other
operating costs will average $4.87 per month and
overhead expenses will run an average of $1.21 per
month. The bank hopes to achieve a profit margin over
these particular costs of 10 percent of total monthly
costs. What monthly fee should it charge a customer
who opens one of these checking accounts?
3.2. Use the APY formula required by the Truth in
Savings Act for the following calculation. Suppose that
a customer holds a savings deposit in a savings bank for
a year. The balance in the account stood at $2,000 for
180 days and $100 for the remaining days in the year. If
the Savings bank paid this depositor $8.50 in interest
earnings for the year, what APY did this customer
receive?
3.3. Monica Lane maintains a savings deposit with
Monarch Credit Union. This past year Monica received
$10.75 in interest earnings from her savings account.
Her savings deposit had the following average balance
each month:
Januar $4 July $35
y 00 0
Februa 25 Augus 425
ry 0 t
March 30 Septe 550
0 mber
April 15 Octob 600
7
0 er
May 22 Nove 625
5 mber
June 30 Decem 300
0 ber
What was the annual percentage yield (APY) earned on
Monica’s savings account?
3.4. The National Bank of Mayville quotes an APY of
3.5 percent on a one-year money market CD sold to one
of the small businesses in town. The firm posted a
balance of $2,500 for the first 90 days of the year,
$3,000 over the next 180 days, and $4,500 for the
remainder of the year. How much in total interest
earnings did this small business customer receive for
the year?
3.5. Gold Mine Pit Savings Association finds that it can
attract the following amounts of deposits if it offers new
depositors and those rolling over their maturing CDs the
interest rates indicated below:
Expected Rate of Interest
Volume Offered
of New Depositors
Deposits
$10 million 3.00%
15 million 3.25
8
20 million 3.50
26 million 3.75
28 million 4.00
Management anticipates being able to invest any new
deposits raised in loans yielding 6.25 percent. How far
should this thrift institution go in raising its deposit
interest rate in order to maximize total profits
(excluding interest costs)?
Chapter 4
4.1 A lender's cost accounting system reveals that its
losses on real estate loans average 0.45 percent of loan
volume and its operating expenses from making these
loans average 1.85 percent of loan volume. If the gross
yield on real estate loans is currently 8.80 percent, what
is this lender's net yield on these loans?
4.2 Suppose a business borrower projects that it will
experience net profits of $2.1 million, compared to $2.7
million the previous year and will record depreciation
and other noncash expenses amounted of $0.7 million
this year versus $0.6 million last year. What is this
firm’s projected cash flow for this year? Is the firm’s
cash flow rising or falling? What are the implications
for a lending institution thinking of loaning money to
this firm? Suppose sales revenue rises by $0.5 million,
costs of goods sold decreases by $0.3 million, while
cash tax payments increase by $0.1 million and noncash
9
expenses decrease by $0.2 million. What happens to
the firm’s cash flow? What would the lender’s likely
reaction to these events?
4.3 The lending function of depository institutions is
highly regulated and this chapter gives some examples
of the structure of these regulations for national banks.
In this problem you are asked to apply those regulations
to Tree Rose National Bank (TRNB). Tea Rose has the
following sources of funds: $250 million in capital and
surplus, $200 million in demand deposits, $775 million
in time and savings deposits, and $200 million in
subordinated debt.
4.4 Aspiration Corporation, seeking renewal of its $12
million credit line, reports the data in the following
table (in millions of dollar) to Hot Springs National
Bank’s loan department. Please calculate the firm’s
cash flow as defined earlier in this chapter. What trends
do you observe, and what are their implications for the
decision to renew or not renew the firm’s line of credit?
Ne
xt
20 20 20 20 Ye
X1 X2 X3 X4 ar
Costs of $5. $5. $5. $6. $6.
Goods Sold 1 5 7 0 4
Selling and $8. $8. $8. $8. $8.
10
Admin Exp. 0 2 3 6 9
Sales $7. $8. $8. $9. $9.
Revenue 9 4 8 5 9
Depreciatio
n and other
noncash $1 $1 $1 $1 $1
expenses 1.2 1.2 1.1 1.0 0.9
Taxes Paid $4. $4. $4. $4. $3.
in Cash 4 6 9 1 6
4.5 Crockett Manufacturing and Service Company
holds a sizeable inventory of dryers and washing
machines, which it hopes to sell retail dealers over the
next six months. These appliances have a total
estimated market value currently of $25 million. The
firm also reports accounts receivable currently
amounting to $12,650,000. Under the guidelines for
taking collateral discussed in this chapter, what is the
minimum size loan or credit line Crockett is likely to
receive from its principal lender? What is the
maximum size loan or credit line Crockett is likely to
receive?
4.6 Butell Manufacturing has an outstanding $11
million loan with Citicenter Bank for the current year.
As required in the loan agreement, Butell reports
selected data items to the bank each month. Based on
the following information, is there any indication of a
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developing problem loan? About what dimensions of
the firm’s performance should Citicenter Bank be
concerned?
One Two Three Four
Current Month Months Months Months
Month Ago Ago Ago Ago
Cash account (millions of dollars) $ 33 $ 57 $ 51 $ 44 $ 43
Projected sales (millions of dollars) $ 298 $ 295 $ 294 $ 291 $ 288
Stock price per share
(monthly average) $ 6.60 $ 6.50 $ 6.40 $ 6.25 $ 6.50
Capital structure (equity/debt ratio
in percent) 32.8% 33.9% 34.6% 34.9% 35.7%
Liquidity ratio (current assets/
current liabilities) 1.10x 1.23x 1.35x 1.39x 1.25x
Earnings before interest and taxes
(EBIT; in millions of dollars) $ 15 $ 14 $ 13 $ 11 $ 13
Return on assets (ROA; percent) 3.32% 3.25% 2.98% 3.13% 3.11%
Sales revenue (millions of dollars) $ 290 $ 289 $ 290 $ 289 $ 287
Chapter 5
5.1 From the descriptions below please identify what
type of business loan is involved.
a. A temporary credit supports construction of homes,
apartments, office buildings, and other permanent
structures.
b. A loan is made to an automobile dealer to support the
shipment of new cars.
c. Credit extended on the basis of a business’s accounts
receivable.
d. The term of an inventory loan is being set to match
the length of time needed to generate cash to repay the
loan.
e. Credit extended up to one year to purchase raw
materials and cover a seasonal need for cash.
12
f. A security dealer requires credit to add new
government bonds to his security portfolio.
g. Credit granted for more than a year to support
purchases of plant and equipment.
h. A group of investors wishes to take over a firm using
mainly debt financing.
i. A business firm receives a three-year line of credit
against which it can borrow, repay, and borrow again
if necessary during the loan’s term.
j. Credit extended to support the construction of a toll
road.
5.2 From the data given in the following table, please
construct as many of the financial ratios discussed in
this chapter as you can and then indicate the dimension
of a business firm’s performance each ratio represents.
Business Assets Annual Revenue and Expense Items
Cash account 50 Net sales 650
Accounts receivable 155 Cost of goods sold 485
Inventories 128 Wages and salaries 58
Fixed assets 286 Interest expense 28
Miscellaneous assets 96 Overhead expenses 29
715 Depreciation expenses 12
Liabilities and Equity Selling, administrative,
Short-term debt: and other expenses 28
Accounts payable 108 Before-tax net income 10
Notes payable 107* Taxes owed 3
Long-term debt (bonds) 325* After-tax net income 7
Miscellaneous liabilities 15
Equity capital 160
715
* Annual principal payments on bonds and notes
payable total $55. The firm’s marginal tax rate is 35
percent.
13
5.3 Pecon Corporation has placed a term loan request
with its lender and submitted the following balance
sheet entries for the year just concluded and the pro
forma balance sheet expected by the end of the current
year. Construct a pro forma Statement of Cash Flows
for the current year using the consecutive balance sheets
and some additional needed information. The forecast
net income for the current year is $225 million with $50
million being paid out in dividends. The depreciation
expense for the year will be $100 million and planned
expansions will require the acquisition of $300 million
in fixed assets at the end of the current year. As you
examine the pro forma Statement of Cash Flows, do
you detect any changes that might be of concern either
to the lender’s credit analyst, loan officer, or both?
Pecon Corporation
(all amounts in millions of dollars)
Assets Liabilities Liabilities
Asstes at Projected and Equity and Equity
the End of for the End at the End for the End
the Most of the of the most of the
Recent Curreny recent Current
Year Year Year Year
Cash $ 532 $ 624 Accounts payable $ 970 $ 1,279
Accounts receivable 1,018 1,210 Notes payable 2,733 2,950
Inventories 894 973 Taxes payable 327 216
Net fixed assets 2,740 2,940 Long-term debt obligations 872 931
Other assets 66 87 Common stock 85 85
Undivided profits 263 373
Total assets $ 5,250 $ 5,834 Total liabilities and equity capital $ 5,250 $ 5,834
14
5.4 As a loan officer for Sun Flower National Bank,
you have been responsible for the bank’s relationship
with USF Corporation, a major producer of remote-
control devices for activating television sets, DVDs,
and another audio-video equipment. USF has just filed
a request for renewal of its $10 million line of credit,
which will cover approximately nine months. USF also
regularly uses several other services sold by the bank.
Applying customer profitability analysis (CPA) and
using the most recent year as a guide, you estimate that
the expected revenues from this commercial loan
customer and the expected costs of serving this
customer will consist of the following:
Expected Revenues Expected Costs
Interest income from the Interest paid on customer
requested loan (assuming an deposits (3.5%) —?
annualized loan rate of 4% Cost of other funds raised 180,000
for 9 months) —? Account activity costs 5,000
Loan commitment fee (1%) 100,000 Wire transfer costs 1,300
Deposit management fees 4,500 Loan processing costs 12,400
Wire transfer fees 3,500 Recordkeeping costs 4,500
Fees for agency services 4,500
The bank’s credit analysts estimated the customer
probably will keep an average deposit balance of
$2,125,000 for the year the line is active. What is the
expected net rate of return from this proposed loan
renewal if the customer actually draws down the full
amount of the requested line for nine months? What
decision should the bank make under the foregoing
assumptions? If you decide to turn down this request,
under what assumptions regarding revenues, expenses,
15
and customer deposit balances would you be willing to
make this loan?
5.5 In order to help fund a loan request of $10 million
for one year from one of its best customers, Lone Star
Bank sold negotiable CDs to its business customers in
the amount of $6 million at a promised annual yield of
3.50 percent and borrowed $4 million in the Federal
funds market from other banks at today’s prevailing
interest rate of 3.25 percent.
Credit investigation and recordkeeping costs to
process this loan application were an estimated
$25,000. The Credit Analysis Division recommends a
minimal 1 percent risk premium on this loan and a
minimal profit margin of one-fourth of a percentage
point. The bank prefers using cost-plus loan pricing in
this case. What loan rate would it charge?
Chapter 6
6.1 Mr. and Mrs. Napper are interested in funding
their children's college education by taking out a home
equity loan in the amount of $24,000. Eldridge
National Bank is willing to extend a loan, using the
Napper's home as collateral. Their home has been
appraised at $110,000, and Eldridge permits a
customer to use no more than 70 percent of the
appraised value of the home as a borrowing base. The
Nappers still owe $60,000 on the first mortgage against
16
their home. Is there enough residual value left in the
Nappers’ home to support their loan request? How
could the lender help them meet their credit needs?
6.2 Ben James has just been informed by a finance
company that he can access a line of credit of no more
than $75,000 based upon the equity value in his home.
James still owes $125,000 on a first mortgage against
his home and $25,000 on a second mortgage claim
against the home, which was incurred last year to
repair the roof and driveway. If the appraised value of
James’s residence is $300,000, what percentage of the
home's estimated market value is the lender using to
determine James’s maximum available line of credit?
Ben James has just been informed by a finance company that he can access a line of credit of
no more than $75,000 based upon the equity value in his home. James still owes $125,000 on
a first mortgage against his home and $25,000 on a second mortgage claim against the home,
which was incurred last year to repair the roof and driveway. If the appraised value of
James’s residence is $300,000, what percentage of the home's estimated market value is the
lender using to determine James’s maximum available line of credit?
Maximum Credit Line Available = Appraised Value * Allowable Percentage of Market Value
- Mortgage Loans Outstanding
Substituting in what we know:
$75,000 = $300,000 *Allowable Percentage of Market Value -$150,000
Or
$225,000 = $300,000 * Allowable percentage of Market Value
0.75 = Allowable Percentage of Market Value
Or about 75%.
6.3 Jamestown Savings Bank, in renewing its credit
card customers finds that of those customers scoring
40 points or less on its credit-scoring system, 35
percent (or a total of 10,615 credit customers) turned
out to be delinquent credits resulting in total losses.
17
This group of bad credit card loans averaged $6,800 in
size per customer account. Examining its successful
credit accounts Jamestown finds that 12% of its good
customers (or a total of 3,640 customers) scored 40
points or less on the bank’s scoring system. These low
scoring but good accounts generated about $1,700 in
revenues each. If Jamestown’s credit card division
follows the decision rule of granting credit cards only
to those customers scoring more than 40 points and
future credit accounts generate about the same
average revenues and losses, about how much can the
bank expect to save in net losses.
6.4 The Lathrop family needs some extra funds to put
their two children through college starting this coming
fall and to buy a new computer system for a part-time
home business. They are not sure of the current
market value of their home, though comparable 4-
bedroom homes are selling for about $410,000 in the
neighborhood. The Monarch University Credit Union
will loan 75 percent of the property’s appraised value,
but the Lathrops still owe $265,000 on their home
mortgage and home improvement loan combined.
What maximum amount of credit is available to this
family should it elect to seek a home equity credit line?
6.5 The Crockett family has asked for a 30-year
mortgage in the amount of $325,000 to purchase a
18
home. At a 7 percent loan rate, what is the required
monthly payment?
6.6 The Watson family has been planning a vacation to
Europe for the past two years. Gratton Savings agrees
to advance a loan of $7,200 to finance the trip
provided the Watsons pay the loan back in 12 equals
monthly installments. Gratton will charge an add-on
loan rate of 6%. How much in interest will the
Watsons pay under the add-on loan rate method?
What is the amount of each required monthly
payment? What is the effective loan rate in this case?
6.7 Jane Zahrley’s request for a four-year automobile
loan for $33,000 has been approved. Reston Center
Bank will require equal monthly installment payments
for 48 months. The bank tells Jane that she must pay a
total of $5,500 in finance charges. What is the loan’s
APR?
6.7 Mary Cantrary is offered a $1,600 loan for a year
to be paid back in equal quarterly installments of $400
each. If Mary is offered the loan at 8 percent simple
interest, how much in total interest charges will she
pay? Would Mary be better off (in terms of lower
interest cost) if she were offered the $1,600 at 6
percent simple interest with only one principal
payment when the loan reaches maturity? What
19
advantage would this second set of loan terms have
over the first set of loan terms?
Chapter 7
7-1. A government bond is currently selling for $1,150
and pays $75 per year in interest for 14 years when it
matures. If the redemption value of this bond is
$1,000, what is its yield to maturity if purchased today
for $1,150?
7-2. Suppose the government bond described in
problem 1 above is held for five years and then the
savings institution acquiring the bond decides to sell it
at a price of $975. Can you figure out the average
annual yield the savings institution will have earned for
its five-year investment in the bond?
7-3. U.S. Treasury bills are available for purchase
this week at the following prices (based upon $100 par
value) and with the indicated maturities:
a. $98.50, 182 days.
b. $97.50, 270 days.
c. $99.25, 91 days.
20
Calculate the bank discount rate (DR) on each bill if it is
held to maturity. What is the equivalent yield to
maturity (sometimes called the bond-equivalent or
coupon equivalent yield) on each of these Treasury
Bills?
7-4. Clarksville Financial reports a net interest margin
of 2.75 percent in its most recent financial report with
total interest revenues of $95 million and total interest
costs of $82 million. What volume of earning assets
must the bank hold? Suppose the bank’s interest
revenues rises by 5 percent and its interest costs and
earnings assets increase by 9 percent. What will
happen to Clarksville’s net interest margin?
7-5. If a credit union’s net interest margin, which was
2.50 percent, increases 15 percent and its total assets,
which stood originally at $625 million, rise by 20
percent, what change will occur in the bank's net
interest income?
7-6. The cumulative interest-rate gap of Jamestown
Savings Bank increases 75 percent from an initial figure
of $22 million. If market interest rates rise by 25
percent from an initial level of 4.5 percent, what
change will occur in this thrift’s net interest income?
21
7-7. Old Settlers State Bank has recorded the following
financial data for the past three years (dollars in
millions):
Current Previous Two
Year Year Years
Ago
Interest revenues $80 $82 $84
Interest expenses 66 68 70
Loans (Excluding 400 405 400
nonperforming)
Investments 200 195 200
Total deposits 450 425 475
Money market 100 125 75
borrowings
What has been happening to the bank’s net interest
margin? What do you think caused the changes you
have observed? Do you have any recommendations for
Old Settlers management team?
7-8 Fluffy Cloud Savings Bank currently has the
following interest-sensitive assets and liabilities on its
balance sheet with the interest-rate sensitivity weights
noted.
Interest- Inde Interest-Sensitive Index
Sensitive x Liabilities
22
Assets
Federal fund 1.00
loans $50
Security 1.20 Interest-bearing .75
holdings $50 deposits $250
Loans and 1.45 Money-market .95
leases $310.8 borrowings $85
What is the bank’s current interest-sensitive gap?
Adjusting for these various interest-rate sensitivity
weights what is the bank’s weighted interest-sensitive
gap? Suppose the federal funds interest rate increases
or decreases one percentage point. How will the bank’s
net interest income be affected (a) given its current
balance sheet makeup and (b) reflecting its weighted
balance sheet adjusted for the foregoing rate-sensitive
indexes?
7-9 Twinkle Savings Association has interest-sensitive
assets of $325 million, interest-sensitive liabilities of
$325 million, and total assets of $500 million. What is
the bank’s dollar interest-sensitive gap? What is
Twinkle’s relative interest-sensitive gap? What is the
value of its interest-sensitivity ratio? Is it asset sensitive
or liability sensitive? Under what scenario for market
interest rates will Twinkle experience a gain in net
interest income? A loss in net interest income?
23
7-10 Richman Bank,, N.A., has a portfolio of loans
and securities expected to generate cash inflows for
the bank as follows:
Expected Cash Annual Period in Which
Inflows of Cash Receipts Are
Principal & Expected
Interest
Payments
$1,500,675 Current
year
746,872 Two years
from today
341,555 Three years
from today
62,482 Four years
from today
9,871 Five years
from today
Deposits and money market borrowings are expected
to require the following cash outflows:
Expected Cash Annual Period during
Outflows of Which Payments must be
Principal $ Made
Interest
24
Payments
$1,595,786 Current
year
831,454 Two years
from today
123,897 Three years
from today
1,005 Four years
from today
----- Five years
from today
If the discount rate applicable to the previous cash
flows is 5 percent, what is the duration of the
Richman’s portfolio of earning assets and of its
deposits and money market borrowings? What will
happen to the bank's total returns, assuming all other
factors are held constant, if interest rates rise? If
interest rates fall? Given the size of the duration gap
you have calculated, in what type of hedging should
Richman engage? Please be specific about the hedging
transactions that are needed and their expected
effects.
7-11. Given the cash inflow and outflow figures in
Problem 11 for Richman Bank, N.A., suppose that
interest rates began at a level of 5 percent and then
25
suddenly rise to 5.75 percent. If the bank has total
assets of $5 billion and total liabilities of $4.5 billion, by
how much would the value of Richman’s net worth
change as a result of this movement in interest rates?
Suppose, on the other hand, that interest rates decline
from 5 percent to 4.5 percent. What happens to the
value of Richman’s net worth in this case and by how
much in dollars does it change? What is the size of its
duration gap?
7-12. A financial firm holds a bond in its investment
portfolio whose duration is 13.5 years. Its current
market price is $950. While market interest rates are
currently at 7 percent for comparable quality
securities, a decrease in interest rates to 6.75 percent
is expected in the coming weeks. What changes (in
percentage terms) will this bond’s price experience if
market interest rates change as anticipated?
7-13. A savings bank’s weighted average asset
duration is 10 years. Its total liabilities amount to $925
million, while its assets total 1 billion dollars. What is
the dollar-weighted duration of the bank’s liability
portfolio if it has a zero leverage – adjusted duration
gap ?
26
7-14 Blue Moon National Bank holds assets and
liabilities whose average durations and dollar amounts
are as shown in this table:
$
Asset and Avg.Duratio Amoun
Liability Items n(yrs) t
Investment
Grade Bonds 12.00 $65.00
Commercial $400.0
Loans 4.00 0
$250.0
Consumer Loans 8.00 0
$600.0
Deposits 1.10 0
Nondeposit
Borrowings 0.25 $50.00
What is the weighted average duration of New Phase’s
asset portfolio and liability portfolio? What is the
leverage-adjusted duration gap?
7-15. Suppose that a thrift institution has an
average asset duration of 2.5 years and an average
liability duration of 3.0 years. If the thrift holds total
assets of $560 million and total liabilities of $467
million, does it have a significant leverage-adjusted
27
duration gap? If interest rates rise, what will happen to
the value of its net worth?
28
