ANSWER KEY

MGF 661:
Multiple choices:
1.
2.
3.
4.
5.

D
A
A
D
B

6.
7.
8.
9.
10.

C
D
D
B
A

11. Problems:
12. 1.a IS gap
13.
14.
15.

= IS Assets-IS liabilities
= (500+50+750)-(300+500)
=$1300-800
= $500 million

16.
17. b. IS ratio
18.
19.

= IS Assets/ IS liabilities
= 1300/800
= 1.63

20.
21. c. If interest rates rise by 0.5%
22.
Change in net interest income= IS gap*change in interest rate
23.
=$500*0.005
24.
=$2.5 million increase
25.
26. 2.a $100,000,000*0.01*(30/360)

=$83,333.33

27.

=$104,166.67

28.

b. $100,000,000*0.0125*(30/360)

Increase interest expense for bank = $ 20,833.34

29.
30. c. i) Short hedge
31.
32.
33.

ii) $100,000,000*0.96*(30/360)
$100,000,000*0.948*(30/360)
Gain on hedge

34. iii) Net overall gain or loss

35.
$100,000-$20,833.34

= $8,000,000
= $7,900,000
= $100,000
= $79,166.66

36. 3.a Loss on sale of bonds

37.
$10,000,000-$9,750,000
38.
39.

Tax impact:
$2,50,000*0.30

Gain

= $250,000

Loss

=$75,000

Tax benefit

40.
41. b. Net effect this year
42.
Old bonds $10,000,000*0.05 = $500,000
Interest
43.
New bonds $10,000,000*0.06 = $
600,000
Interest
44.
Interest income increase
$100,000
45.
46. Net effect:
47.

$75,000
+ $100,000

Tax benefit
Increase interest income

48.
49.

$175,000

Higher earnings