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Question : Complete all three parts of this question.
: 6711

Complete all three parts of this question.

Suppose KPM Bank has the following balance sheet (in billions of dollars):

Assets

Liabilities

Reserves

$10

Deposits

$80

Loans

$95

Capital

$25

a) If net profit of this bank is $2 billion, then what is the return on assets (ROA) and the return on equity (ROE)? Demonstrate that ROE = ROA x EM.

b) A bank has $105 billion of assets with average duration of 5 years and $80 billion of liabilities with average duration of 6 years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates fall by 1%. What action should the bank take to reduce interest rate risk?

c) A bank has $80 billion of fixed-rate liabilities, $25 billion of rate-sensitive liabilities, $10 billion of fixed-rate assets, and $95 billion of rate-sensitive assets. Conduct a gap analysis for the bank, and show what will happen to the bank profits if interest rates fall by 1%. What action should the bank take to reduce interest rate risk?

Assets |
Liabilities |
||

Reserves |
$10 |
Deposits |
$80 |

Loans |
$95 |
Capital |
$25 |