14. Consider the following balance sheet for WatchoverU Savings, Inc.

(in millions):
ssets !iabilities and "#$it%
&loating'rate mortgages 1'%ear time de(osits
(c$rrentl% 1)* ann$all%) +,) (c$rrentl% -* ann$all%) +.)
/)'%ear fi0ed'rate loans /'%ear time de(osits
(c$rrentl% .* ann$all%) +,) (c$rrentl% .* ann$all%) +1)
"#$it% +1)
2otal ssets +1)) 2otal !iabilities 3 "#$it% +1))
a. What is WatchoverU4s e0(ected net interest income at %ear'end5
C$rrent e0(ected interest income: +,)m().1)) 6 +,)m().).) 7 +8.,m.
"0(ected interest e0(ense: +.)m().)-) ' +1)m().).) 7 +,.-m.
"0(ected net interest income: +8.,m ' +,.-m 7 +1.9m.
b. What will net interest income be at %ear'end if interest rates rise b% 1 (ercent5
fter the 1)) basis (oint interest rate increase, net interest income declines to:
,)().11) 6 ,)().).) ' .)().)8) ' 1)(.).) 7 +9.,m ' +..)m 7 +1.,m, a decline of +).4m.
c. Using the c$m$lative re(ricing ga( model, what is the e0(ected net interest income for
a 1 (ercent increase in interest rates5
Wachovia4s: re(ricing or f$nding ga( is +,)m ' +.)m 7 '+1)m. 2he change in net interest
income $sing the f$nding ga( model is ('+1)m)().)1) 7 '+.4m.
d. What will net interest income be at %ear'end if interest rates on ;Ss increase b% 1
(ercent b$t interest rates on ;S!s increase b% 1 (ercent5 Is it reasonable for changes in
interest rates on ;Ss and ;S!s to differ5 Wh%5
fter the $ne#$al rate increases, net interest income will be ,)().11) 6 ,)().).) ' .)().).) '
1)(.).) 7 +9.,m ' +-./m 7 +/.1m, an increase of +)./m. It is not $ncommon for interest
rates to ad<$st in an $ne#$al manner on ;Ss vers$s ;S!s. Interest rates often do not
ad<$st solel% beca$se of mar=et (ress$res. In man% cases the changes are affected b%
decisions of management. 2h$s, %o$ can see the difference between this answer and the
answer for (art a.
1,. Use the following information abo$t a h%(othetical government sec$rit% dealer named >.?.
@organ. >ar=et %ields are in (arenthesis, and amo$nts are in millions.
ssets !iabilities and "#$it%
Cash +1) Avernight re(os +1.)
1'month 2'bills (..),*) ., S$bordinated debt
/'month 2'bills (..1,*) ., .'%ear fi0ed rate (8.,,*) 1,)
8'1
1'%ear 2'notes (..,)*) ,)
8'%ear 2'notes (8.9-*) 1))
,'%ear m$nis (floating rate)
(8.1)* reset ever% - months) 1, "#$it% 1,
2otal assets +//, 2otal liabilities 3 e#$it% +//,
a. What is the re(ricing ga( if the (lanning (eriod is /) da%s5 / months5 1 %ears5 ;ecall
that cash is a noninterest'earning asset.
;e(ricing ga( $sing a /)'da% (lanning (eriod 7 +., ' +1.) 7 '+9, million.
;e(ricing ga( $sing a /'month (lanning (eriod 7 (+., 6 +.,) ' +1.) 7 '+1) million.
;e(rising ga( $sing a 1'%ear (lanning (eriod 7 (+., 6 +., 6 +,) 6 +1,) ' +1.) 7 6+,,
million.
b. What is the im(act over the ne0t /) da%s on net interest income if interest rates increase
,) basis (oints5 Becrease ., basis (oints5
If interest rates increase ,) basis (oints, net interest income will decrease b% +4.,,))).
CII 7 CD?(;) 7 '+9,m.(.)),) 7 '+).4.,m.
If interest rates decrease b% ., basis (oints, net interest income will increase b% +.11,,)).
CII 7 CD?(;) 7 '+9,m.('.)).,) 7 +)..11,m.
c. 2he following one'%ear r$noffs are e0(ected: +1) million for two'%ear 2'notes and +1)
million for eight'%ear 2'notes. What is the one'%ear re(ricing ga(5
2he re(ricing ga( over the 1'%ear (lanning (eriod 7 (+.,m. 6 +.,m. 6 +1)m. 6 +1)m. 6
+1,m.) ' +1.)m. 7 6+/, million.
d. If r$noffs are considered, what is the effect on net interest income at %ear'end if interest
rates rise ,) basis (oints5 Becrease ., basis (oints5
If interest rates increase ,) basis (oints, net interest income will increase b% +1.,,))).
CII 7 CD?(;) 7 +/,m.().)),) 7 +).1.,m.
If interest rates decrease ., basis (oints, net interest income will decrease b% +1-1,,)).
CII 7 CD?(;) 7 +/,m.(').)).,) 7 '+).1-1,m.
1-. ban= has the following balance sheet:
ssets vg. ;ate !iabilitiesE"#$it% vg. ;ate
;ate sensitive +,,),))) ...,* ;ate sensitive +/.,,))) -.1,*
&i0ed rate .,,,))) 8.., &i0ed rate 8),,))) ..,)
Conearning 1-,,))) Con (a%ing /9),)))
2otal +1,,.),))) 2otal +1,,.),)))
8'1
S$((ose interest rates rise s$ch that the average %ield on rate sensitive assets increases b%
4, basis (oints and the average %ield on rate sensitive liabilities increases b% /, basis
(oints.
a. Calc$late the ban=4s re(ricing D? and ga( ratio.
;e(ricing D? 7 +,,),))) ' +/.,,))) 7 +1.,,)))
Da( ratio 7 +1.,,)))E+1,,.),))) 7 11.1,*
b. ss$ming the ban= does not change the com(osition of its balance sheet, calc$late the
res$lting change in the ban=4s interest income, interest e0(ense, and net interest income.
II 7 +,,),)))(.))4,) 7 +1,4.,
I" 7 +/.,,)))(.))/,) 7 +1,/11.,)
CII 7 +1,4., ' +1,/11.,) 7 +1,1-1.,)
c. "0(lain how the CD? and s(read effects infl$enced this increase in net interest income.
2he CD? affect wor=ed to increase net interest income. 2hat is, the CD? was (ositive
while interest rates increased. 2h$s, interest income increased b% more than interest
e0(ense. 2he res$lt is an increase in CII. 2he s(read effect also wor=ed to increase net
interest income. 2he s(read increased b% 1) basis (oints. ccording to the s(read affect, as
s(read increases, so does net interest income.
18. 2he balance sheet of . D. &redwards, a government sec$rit% dealer, is listed below. >ar=et
%ields are in (arentheses, and amo$nts are in millions.
ssets !iabilities and "#$it%
Cash +1) Avernight re(os +/4)
1'month 2'bills (..),*) 1,) S$bordinated debt
/'month 2'bills (..1,*) 1,) .'%ear fi0ed rate (8.,,*) /))
1'%ear 2'notes (..,)*) 1))
8'%ear 2'notes (8.9-*) 1))
,'%ear m$nis (floating rate)
(8.1)* reset ever% - months) ,) "#$it% /)
2otal assets +-.) 2otal liabilities and e#$it% +-.)
a. What is the re(ricing ga( if the (lanning (eriod is /) da%s5 / month da%s5 1 %ears5
;e(ricing ga( $sing a /)'da% (lanning (eriod 7 +1,) ' +/4) 7 '+19) million.
;e(ricing ga( $sing a /'month (lanning (eriod 7 (+1,) 6 +1,)) ' +/4) 7 '+4) million.
;e(rising ga( $sing a 1'%ear (lanning (eriod 7 (+1,) 6 +1,) 6 +1)) 6 +,)) ' +/4) 7 +11)
million.
8'/
b. What is the im(act over the ne0t three months on net interest income if interest rates on
;Ss increase ,) basis (oints and on ;S!s increase -) basis (oints5
II 7 (+1,)m. 6 +1,)m.)(.)),) 7 +1.,m.
I" 7 +/4)m.(.))-) 7 +1.)4m.
CII 7 +1.,m. F (+1.)4m.) 7 '+.,4m.
c. What is the im(act over the ne0t two %ears on net interest income if interest rates on
;Ss increase ,) basis (oints and on ;S!s increase ., basis (oints5
II 7 (+1,)m. 6 +1,)m. 6 +1)) 6 +,))(.)),) 7 +1.1,m.
I" 7 +/4)m.(.)).,) 7 +1.,,m.
CII 7 +1.1,m. F (+1.,,m.) 7 '+./)m.
8'4