1.
You were informed that a bank’s latest income and expense statement contained the
following figures (in $ millions):
Net Interest Income $700
Net Noninterest Income ($300)
Pretax net operating income $372
Security gains $10
Increases in bank’s Undivided
Profit $200
Suppose you also were told that the bank’s total interest income is twice as large as its total
interest expense and its noninterest income is three-fourths of its noninterest expense.
Imagine that its provision for loan losses equals 2 percent of its total interest income, while
its taxes generally amount to 30 percent of its net income before income taxes. Calculate
the following items for this bank’s income and expense statement:
a. Total Interest Income and Total Interest Expense
b. Total Noninterest Income and Total Noninterest Expense
c. Provision for Loan Losses
d. Taxes
e. Dividends
2. A bank reports total operating revenues of $150 million, with total operating expenses
of $130 million, and owes taxes of $5 million. It has total assets of $1.00 billion and total
liabilities of $900 million.
a. What is the bank’s ROE?
b. How will the ROE for this bank change if total operating expenses, taxes and total
operating revenues each grow by 10 percent while assets and liabilities stay fixed.
c. What does ROE become if the bank’s assets and liabilities decrease by 10 percent, while
it’s operating revenues, taxes and operating expenses do not change?
3. A government bond currently carries a yield to maturity of 7 percent and a market price
of $1161.68. If the bond promises to pay $100 in interest annually for five years, what is
its current duration?
4. Clinton National Bank holds $15 million in government bonds having a duration of 7
years. If interest rates suddenly rise from 6 percent to 7 percent, what percentage change
should occur in the bonds’ market price?
5. A savings bank’s weighted average asset duration is 10 years. Its total liabilities amount
to $925 million, while its assets total 1 billion dollars. What is the dollar-weighted duration
of the bank’s liability portfolio if it has a zero leverage – adjusted duration gap ?
6. Clarksville Financial reports a net interest margin of 2.75 percent in its most recent
financial report with total interest revenues of $95 million and total interest costs of $82
million. What volume of earning assets must the bank hold? Suppose the bank’s interest
revenues rises by 5 percent and its interest costs and earnings assets increase by 9 percent.
What will happen to Clarksville’s net interest margin?
7. If a credit union’s net interest margin, which was 2.50 percent, increases 15 percent and
its total assets, which stood originally at $625 million, rise by 20 percent, what change will
occur in the bank's net interest income?
8. Twinkle Savings Association has interest-sensitive assets of $325 million, interest-
sensitive liabilities of $325 million, and total assets of $500 million. What is the bank’s
dollar interest-sensitive gap? What is Twinkle’s relative interest-sensitive gap? What is the
value of its interest-sensitivity ratio? Is it asset sensitive or liability sensitive? Under what
scenario for market interest rates will Twinkle experience a gain in net interest income? A
loss in net interest income?
9. Current market rate is 6.4%/year for one year loans, you predict that this rate is kept
constant until year 3 and then rise by 30bps in year 4, then kept constant again forever. If
you believe in expectation theory, computing the price of a 1000$ par value bond assuming
similar risk, with term to maturity of 5 years, 6% annual coupon rate?
