DePaul University Market Interest Rates Questions
Question Description
PART I:Numerical Exercises.You must show your work.Not showing your work will get you zero points on the question, even if your answer is correct!(20 points)
1.Suppose Bank A has $35 million in rate-sensitive assets, $70 million in fixed rate assets, $70 million in rate sensitive liabilities, and $35 million in fixed rate liabilities and equity capital. (10 points)
a. What is the value of Bank A’s GAP?
b.Calculate the change in Bank A’s profit as a result of a decrease in market interest rates of 3 percentage points.
c.Calculate the change in Bank A’s profit as a result of an increase in market interest rates of 2 percentage points.
d.If you had believed that rates were going to rise by 2 percentage points (before it actually happened), explain how (if at all) you could have altered Bank A’s balance sheet and changed its interest rate risk exposure to improve its subsequent profit performance.
2.Suppose you bought a condo for $100,000 financing it with a $20,000 down payment of your own funds
and an $80,000 mortgage loan from a bank. (10 points)
a.Assume that the market value of your condo has now risen to $120,000.Ignoring interest and other costs, and assuming the loan amount is still $80,000, calculate your rate ofreturn on your asset (ROA) and your rate of return on equity (ROE).
b.Now assume that, instead of (a), you only put down $10,000 and borrowed $90,000 to
buy the condo.Assuming that the market value of your house has risen to $120,000 and ignoring interest and other costs, calculate your rate of return on your asset (ROA) and your rate of return on equity (ROE).
c.Now, instead of (a) or (b), suppose the value of the condo fell from $100,000 to $70,000.Assuming you paid $100,000, financing it with $20,000 of your own money and $80,000 with a mortgage loan, and ignoring interest and other costs, calculate your rate of return on your asset (ROA) and your rate of return on equity (ROE).What is the value of your equity stake in the condo after the price fall?
All your answers should be expressed in percent.
Part II:Identifications (15 points)
Define and explain the importance of all of the following concepts.
Adverse Selection
Moral Hazard
Too Big To Fail Problem
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