Module: ASB3525 – Bank Management

Organiser: Dr Edward Thomas Jones (Office – 1.02 Hen Goleg, E-mail – e.t.jones@bangor.ac.uk)

N.B.

Please submit an electronic copy of your answers ONLY via Turnitin. Put your student ID number

followed by your name as the file name of the electronic copy uploaded to TurnItIn.

Please ensure you mark clearly which question you are answering. You should attempt to answer

every question and clearly show your calculations. The contribution of each Part towards the overall

assignment mark is given below.

The maximum word limit is 1,500 words.

THIS ASSIGNMENT IS DUE BY 5PM ON FRIDAY 17TH APRIL 2020

ASSIGNMENT 2019/20

Part A (worth 15% of the overall assignment mark)

Table 1 presents the balance sheet of Bank A.

TABLE 1 – BALANCE SHEET OF BANK A (ALL VALUES IN £ MM)

Assets Rates Liabilities Rates

Rate sensitive 400 5% 600 1%

Fixed rate 450 7% 200 2%

Non-earning/paying 150 100

Sub-total 900

Equity 100

Total 1,000 1,000

i. Calculate the net interest income, net interest margin, and GAP of Bank A.

ii. Assume that there is a parallel shift in rates by +2% (i.e. +200bps). Explain the expected

impact of this parallel shift on net interest income and net interest margin given the GAP

calculated in part (A.i)?

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iii. Calculate the new net interest income and net interest margin given a +1% (i.e. 100 bps)

parallel shifts in rates.

Part B (worth 35% of the overall assignment mark)

Table 2 presents the balance sheet of Bank B.

TABLE 2 – BALANCE SHEET OF BANK B (ALL VALUES IN £ MM)

Assets Market value Rates

Cash 100

3-years commercial loan 750 10%

6-years treasury bond 150 6%

Total Assets 1,000

Liabilities and Equity

1-year time deposit 500 4%

3-years bond 400 8%

Equity 100

Total Liabilities and Equity 1,000

i. Calculate the weighted average duration of assets, the weighted average duration of

liabilities, net interest income, net interest margin, and the DGAP of Bank B. (Hint: you will

need to calculate the duration for each product first).

ii. Assume that there is a parallel shift in rates by +1% (i.e. +100bps). Explain the expected

impact of this parallel shift on net interest income and net interest margin given the DGAP

calculated in part (B.i)?

iii. Calculate the new net interest income and net interest margin given a +1% (i.e. 100 bps)

parallel shifts in rates.

Part C (worth 50% of the overall assignment mark)

i. Explain what Bank B can do to immunise its portfolio (i.e. what changes should be made to

the balance sheet described in Table B so that DGAP is approximately equal to zero).

ii. Based on your explanation in C.i, calculate the new net interest income and net interest

margin based on this strategy to immunise the portfolio of Bank B. Explain the impact of

this immunisation strategy on net interest income and net interest margin.

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Suggested literature to aid your discussion (you should also find additional literature to support

your answers).

Chaudron, R. (2018). Bank’s interest rate risk and profitability in a prolonged environment

of low interest rates. Journal of Banking and Finance. 89, 94-104.

Frame, S. and White, L. (2005). Fussing and fuming over Fannie and Freddie; How much

smoke, how much fire? Journal of Economic Perspective. 19, 159-184.

Gerlach, J., Mora, N. and Uysal, P. (2018). Bank funding costs in a rising interest rate

environment. Journal of Banking and Finance. 87, 164-186.

Oberoi, J. (2018). Interest rate risk management and the mix of fixed and floating rate

debt. Journal of Banking and Finance. 86, 70-86.

Timothy, G. (2004). Managing interest rate risk in a rising rate environment. RMA Journal,

Risk Management Association (RMA), November 2004