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Consider the following balance sheet for MMC Bancorp (in millions of dollars):                                                                                                                                                                             Assets                                                                 Liabilities/Equity1.  Cash and due from                $    6.25       1.  Equity capital (fixed)                      $25.002.  Short-term consumer loans     62.50        (1-year maturity)                                      2.  Demand deposits                             50.003.  Long-term consumer loans      31.30        (2-year maturity)                                      3.  One-month CDs                                37.504.  Three-month T-bills                   37.50       4.  Three-month CDs                             50.005.  Six-month T-notes                     43.70       5.  Three-month bankers’                                                                               acceptances                                          25.006.  3-year T-bonds                           75.00       6.  Six-month commercial paper          75.007.  10-year, fixed-rate mortgages  25.00      7.  1-year time deposits                         25.008.  30-year, floating-rate mortgages                   (reset every nine months)      50.00       8.  2-year time deposits                        50.009.  Premises                                        6.25                                                                                                                 $337.50                                                                    $337.50                       Which of the following statements is FALSE?A.The one-year cummulative gap (CGAP) is -$18.80 million. B.If interest rates rise by 1.2 percent on RSAs and by 1 percent on RSLs, the expected change in the spread is 0.002.C.The cummulative GAP (CGAP) suggests a positive relation between the change in interest rates and the change in the FI's net interest income. D.If interest rates rise by 1.2 percent on RSAs and by 1 percent on RSLs, the expected change in the net interest income for the FI is $199,400E.If interest rates rise by 1 percent on both one-year rate-sensitive assets (RSAs) and rate-sensitive liabilities (RSLs), the net interest income will fall by -$188,000

Question

Consider the following balance sheet for MMC Bancorp (in millions of dollars):                                                                                                                                                                             Assets                                                                 Liabilities/Equity1.  Cash and due from                  6.25      1. Equitycapital(fixed)               6.25       1.  Equity capital (fixed)                      25.002.  Short-term consumer loans     62.50        (1-year maturity)                                      2.  Demand deposits                             50.003.  Long-term consumer loans      31.30        (2-year maturity)                                      3.  One-month CDs                                37.504.  Three-month T-bills                   37.50       4.  Three-month CDs                             50.005.  Six-month T-notes                     43.70       5.  Three-month bankers’                                                                               acceptances                                          25.006.  3-year T-bonds                           75.00       6.  Six-month commercial paper          75.007.  10-year, fixed-rate mortgages  25.00      7.  1-year time deposits                         25.008.  30-year, floating-rate mortgages                   (reset every nine months)      50.00       8.  2-year time deposits                        50.009.  Premises                                        6.25                                                                                                                 337.50                                  337.50                                                                    337.50                       Which of the following statements is FALSE?A.The one-year cummulative gap (CGAP) is -18.80million. B.Ifinterestratesriseby1.2percentonRSAsandby1percentonRSLs,theexpectedchangeinthespreadis0.002.C.ThecummulativeGAP(CGAP)suggestsapositiverelationbetweenthechangeininterestratesandthechangeintheFI′snetinterestincome. D.Ifinterestratesriseby1.2percentonRSAsandby1percentonRSLs,theexpectedchangeinthenetinterestincomefortheFIis18.80 million. B.If interest rates rise by 1.2 percent on RSAs and by 1 percent on RSLs, the expected change in the spread is 0.002.C.The cummulative GAP (CGAP) suggests a positive relation between the change in interest rates and the change in the FI's net interest income. D.If interest rates rise by 1.2 percent on RSAs and by 1 percent on RSLs, the expected change in the net interest income for the FI is 199,400E.If interest rates rise by 1 percent on both one-year rate-sensitive assets (RSAs) and rate-sensitive liabilities (RSLs), the net interest income will fall by -$188,000

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Solution

To answer this question, we first need to calculate the one-year cumulative gap (CGAP). The CGAP is calculated by subtracting the rate-sensitive liabilities (RSLs) from the rate-sensitive assets (RSAs) for a specific time period.

In this case, the one-year RSAs include:

  • Short-term consumer loans: $62.50 million
  • Three-month T-bills: $37.50 million
  • Six-month T-notes: $43.70 million
  • 3-year T-bonds: 75.00million(onlyathirdofthisamount,or75.00 million (only a third of this amount, or 25.00 million, is rate-sensitive within one year)
  • 30-year, floating-rate mortgages: 50.00million(onlyathirdofthisamount,or50.00 million (only a third of this amount, or 16.67 million, is rate-sensitive within one year)

Adding these together, the total one-year RSAs are $185.37 million.

The one-year RSLs include:

  • Demand deposits: $50.00 million
  • One-month CDs: $37.50 million
  • Three-month CDs: $50.00 million
  • Three-month bankers’ acceptances: $25.00 million
  • Six-month commercial paper: $75.00 million
  • 1-year time deposits: $25.00 million

Adding these together, the total one-year RSLs are $262.50 million.

Subtracting the RSLs from the RSAs, the one-year CGAP is -$77.13 million.

Therefore, statement A. The one-year cumulative gap (CGAP) is -18.80millionisFALSE.Thecorrectone−yearCGAPis−18.80 million is FALSE. The correct one-year CGAP is -77.13 million.

This problem has been solved

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