248 page :problem 1,3,5,7,9

Term Paper

Answer :
Using a financial calculator or Excel the YTM is determined to be 10.68%.

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. $97.25, 182 days.
b. $96.50, 270 days.
c. $98.75, 91 days.
The discount rates and equivalent yields to maturity (bond-equivalentor coupon-equivalent
yields) on each of these Treasury bills are:

5.If a credit union’s net interest margin, which was 2.50 percent, increases 10 percent and
its total assets, which stood originally at $575 million, rise by 20 percent, what change will
occur in the bank's net interest income?

The correct formula is:

 Net interest income
Net interest margin 
Total earning assets

Original net interest income = Net interest margin × Total earning assets
= 2.5% × $575 million = $14.375 million

New net interest income:

Net interest income

0.025 1.10 
$575 million×1.20

Net Interest Income = 0.0275 × 690

= $18.975 million

Change in net interest income = New net interest income – Original net interest income
= $18.975 million - $14.375 million = $4.6 million.

7.New Comers State Bank has recorded the following financial data for the past three years
(dollars in millions):

Current Year Previous Year Two Years

Ago
Interest revenues $82 $80 $78
Interest expenses 64 66 68
Loans (excluding nonperforming) 450 425 400
Investments 200 195 200
Total deposits 450 425 400
Money market borrowings 150 125 100

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 New Comers’
management team?

Net interest margin (NIM) = Net interest income/Total earning assets

Where,
Net interest income = Net interest revenues - Net interest expenses
Total earning assets = Loans + Investments

NIM (Current) = ($82-64)/ (450 + 200) = 18/650 = 0.028 or 2.77%

NIM (Previous) = ($80-66)/ (425 + 195) = 14/620 = 0.0226 or 2.26%
NIM (Two years ago) = ($78-68)/ (400 + 200) = 10/600 = 0.0167 or 1.67%

The net interest margin has been increasing over the years. As interest revenues and expenses as
well as the bank’s assets have increased consistently over the years, there has been a constant
increase in the net interest margin. If the bank can further cut down on its interest expenses and
increase its assets in the next years, the net interest margin will increase at a higher rate.

9. Sunset Savings Bank currently has the following interest-sensitive assets and
liabilities on its balance sheet with the interest-rate sensitivity weights noted.

Interest-Sensitive Assets $ Amount Rate Sensitivity Index

Federal fund loans $ 50.00 1.00
Security holdings 50.00 1.20
Loans and leases 350.00 1.45
Interest-Sensitive Liabilities $ Amount Rate Sensitivity Index
Interest-bearing deposits $ 250.00 0.75
Money-market borrowings 90.00 0.95

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 50 basis points. 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-sensitivity indexes?

Dollar IS Gap = ISA - ISL = ($50 + $50 + $350) − ($250 + $90) = $110

Weighted IS Gap  1   $50   1.20    50   1.45    350     0.75   $250    0.95    $90  
 $50  $60  $507.5  $187.5  $85.5
 $617.5  $273
 $344.5

a.) Change in Bank’s Income = IS Gap × Change in interest rates

= ($110) (0.005) = $0.55 million

Using the regular IS Gap; net income will change by plus or minus $550,000

b.) Change in Bank’s Income = Weighted IS Gap × Change in interest rates

= ($344.50) (0.005) = $1.72250

Using the weighted IS Gap; net income will change by plus or minus $1,722,500.