Dgap Calculation
Review Questions
5.1 What is asset-liability management?
Asset/liability management is the coordinated management of the entire portfolio of a financial institution. It considers both the acquisition of funds from various sources and the allocation of funds to profitable investments. The traditional focus of ALM has been on net interest income. However, it also considers market values, via duration. Finally, simulations allow other aspects of risk management to be brought into the ALM process.
5.1 Given the following information:
Assets $ Rate Liabs & Equity $ Rate
RSA $3,000 10.0% RSL $2,000 8.0%
NonRSA 1,500 9.0 NonRSL 2,000 7.0
Nonearning500 Equity 1,000 $5,000 $5,000
a. Calculate the expected net interest income at current interest rates and assuming no change in the composition of the portfolio. What is the net interest margin?
b. Assuming that all interest rates rise by 1 percentage point, calculate the new expected net interest income and net interest margin.
a. Net interest income = $3,000 (.10) + $1,500 (.09) - $2,000 (.08) - $2,000 (.07) = $435 - $300 = $135 Net interest margin = $135/$4,500 = 0.03 or 3.0%
c. Net interest income = $3,000(0.11) +$1,500(0.09) - $2,000(0.09) - $2,000 (.07) = $145
Net interest margin = $145/$4,500 = 0.0322 = 3.22%
(Note only rate sensitive items are impacted by the change in interest rates)
5.2 Given the following information:
ABC National Bank ($ Millions)
Assets Liabilities and Equity
RSA $200 (12%) RSA $300 (6%)
NonRSA 400 (11%) NonRSA 300 (5%)
Nonearn 100 Equity 100
Total $700 Total $700
a. What is the dollar gap? net interest income? net interest margin? How much will net interest income change if interest rates fall by 200 basis points?
b. What changes in portfolio composition would you recommend to management if you expected interest
5.1 What is asset-liability management?
Asset/liability management is the coordinated management of the entire portfolio of a financial institution. It considers both the acquisition of funds from various sources and the allocation of funds to profitable investments. The traditional focus of ALM has been on net interest income. However, it also considers market values, via duration. Finally, simulations allow other aspects of risk management to be brought into the ALM process.
5.1 Given the following information:
Assets $ Rate Liabs & Equity $ Rate
RSA $3,000 10.0% RSL $2,000 8.0%
NonRSA 1,500 9.0 NonRSL 2,000 7.0
Nonearning500 Equity 1,000 $5,000 $5,000
a. Calculate the expected net interest income at current interest rates and assuming no change in the composition of the portfolio. What is the net interest margin?
b. Assuming that all interest rates rise by 1 percentage point, calculate the new expected net interest income and net interest margin.
a. Net interest income = $3,000 (.10) + $1,500 (.09) - $2,000 (.08) - $2,000 (.07) = $435 - $300 = $135 Net interest margin = $135/$4,500 = 0.03 or 3.0%
c. Net interest income = $3,000(0.11) +$1,500(0.09) - $2,000(0.09) - $2,000 (.07) = $145
Net interest margin = $145/$4,500 = 0.0322 = 3.22%
(Note only rate sensitive items are impacted by the change in interest rates)
5.2 Given the following information:
ABC National Bank ($ Millions)
Assets Liabilities and Equity
RSA $200 (12%) RSA $300 (6%)
NonRSA 400 (11%) NonRSA 300 (5%)
Nonearn 100 Equity 100
Total $700 Total $700
a. What is the dollar gap? net interest income? net interest margin? How much will net interest income change if interest rates fall by 200 basis points?
b. What changes in portfolio composition would you recommend to management if you expected interest