• Blaire


If a bank manager was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the bank’s six-month repricing gap to take advantage of this anticipated rise? What if the manger believed rates would fall in the next six months

Consider the following balance sheet for WatchoverU Bank (in millions): Assets

$ Liabilities and equity

Floating-rate mortgages (currently 10% annually)

30-year fixed-rate loans (currently 7% annually)

Total assets

50 1-year term deposits (currently 6% annually)

50 3-year term deposits (currently 7% annually) Equity

100 Total liabilities and equity $ 70 20 10 100

(a) What is WatchoverU’s expected net interest income (NII) at year-end? (1 mark) (b) What will NII be at year-end if interest rates rise by 2 per cent? (2 marks) (c)

Using the cumulative repricing gap model, what is the expected NII for a 2 per cent increase in interest rates? (2 marks)

(d) What will NII be at year-end if interest rates on RSAs increase by 2 per cent but interest rates on RSLs increase by 1 per cent? Is it reasonable for changes in interest rates on RSAs and RSLs to differ? Why? (7 marks)