Interest Rate Risk Analysis Case Study : Brac Bank
Table of Content
1. Executive summary iv 2. Introduction 2 3. Repricing Model 2 I) Refunding or funding gap 3 II) Advantage/Disadvantage 4-5 4. Maturity Model 6-10 5. Weakness of maturity model 11 6. Duration Model 12-15 7. Limitation of Duration model 15 8. Case Study –Brac Bank Ltd 16-20
INTRODUCTION:
Interest Rate Risk - In the process of FIs performing their asset-transformation function, FIs are exposed to Interest Rate Risk, from Mismatched Maturity/Duration: Borrowing Short, Lending Long. The risk that an investment 's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap).
Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates.
REPRICING MODEL
Repricing Model is a CF analysis of interest income (+cfs) from loans; and interest expense (-CF) on deposits, looking at Rate-Sensitive Assets (RSAs) vs. Rate-Sensitive Liabilities (RSLs). Rate sensitivity results from either:
a) variable rate loans or deposits that adjust to market rates, or
b)
1. Executive summary iv 2. Introduction 2 3. Repricing Model 2 I) Refunding or funding gap 3 II) Advantage/Disadvantage 4-5 4. Maturity Model 6-10 5. Weakness of maturity model 11 6. Duration Model 12-15 7. Limitation of Duration model 15 8. Case Study –Brac Bank Ltd 16-20
INTRODUCTION:
Interest Rate Risk - In the process of FIs performing their asset-transformation function, FIs are exposed to Interest Rate Risk, from Mismatched Maturity/Duration: Borrowing Short, Lending Long. The risk that an investment 's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap).
Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates.
REPRICING MODEL
Repricing Model is a CF analysis of interest income (+cfs) from loans; and interest expense (-CF) on deposits, looking at Rate-Sensitive Assets (RSAs) vs. Rate-Sensitive Liabilities (RSLs). Rate sensitivity results from either:
a) variable rate loans or deposits that adjust to market rates, or
b)