Econ 210 Term Project - Winter 2016 1. (Income Gap Analysis) Suppose that the First Bank has the following balance sheet (in millions of dollars), where RSAs are Variable-rate loans and ST securities, and RSLs are Variable-rate CDs and Money Market Deposits. Assets Liabilities Variable-rate loans 20 Variable-rate CDs 30 Short-term securities 10 Money Market Deposits 15 Reserves 10 Overnight Funds 5 Long-term loans 40 Chequable and Savings Deposits 30 Long-term securities 10 Long-term CDs 10 a. Calculate the income gap. b. If interest rates suddenly increase by two percentage points, will First Bank’s profits (net interest income) increase or decrease, and by how much? Show calculations. c. If, instead, interest rates were to drop by three percentage points, what will be the change in First Bank’s profits (net interest income)? Show calculations. d. Repeat parts b and c to calculate the changes in interest rate margin in each case. e. Suppose the bank decides to convert $25mln of its variable CDs to long-term CDs. How would an increase of interest rates by 2% affect on the interest margin and income in this case? Would this increase or decrease interest rate risk? Explain! Show calculations. Assets Liabilities 2. The average duration of the assets and the liabilities are 1.16 and 2.77, respectively, for XYZ Company. Assuming they cannot do anything to the average duration of the liabilities, how (calculate the new value for average duration of assets) can they alter the average duration assets to ensure that any fluctuation of interest rates does not affect the value of net worth as a percentage of assets? Show all calculations. 3. (Duration Gap Analysis) XYZ Bank has total asset value of $200 million, and total liability value of $180 million. The average duration of assets is 2.5, and the average duration of liabilities is 1.1. a. What is the duration gap for XYZ bank? b. What is the change in the market value of net worth as a percentage of assets if interest rates fall from 6% to 5%? Show calculations. c. Would you get the same results if you were to calculate the change in the market value of the assets (%ΔPA) and liabilities (%Pll.)? Show calculations.4. (Open Market Operations) One of the ways the Bank of Canada exercises control over the monetary base is through its purchases and sales of government securities in the open market, called open market operations. a) How will a Bank of Canada sale of $100 of government bonds to the nonblank public affect the monetary base and reserves if the nonblank public pays for the bonds with cheques? Fill in the following T-accounts in arriving at your answer. Clearly mention what asset and/or liability item will be affected, the direction of the change ((+) or (-)) and the dollar amount of the change. Nonbank Public Assets LiabilitiesBanking System Assets LiabilitiesThe Bank of Canada Assets LiabilitiesChange in monetary base = --------------$ Change in reserves = - ...

1. Econ 210 Term Project - Winter 2016
1. (Income Gap Analysis) Suppose that the First Bank has the
following balance sheet (in millions of dollars), where RSAs are
Variable-rate loans and ST securities, and RSLs are Variable-
rate CDs and Money Market Deposits.
Assets
Liabilities
Variable-rate loans
20
Variable-rate CDs
30
Short-term securities
10
Money Market Deposits
15
Reserves
10
Overnight Funds
5
Long-term loans
40
Chequable and Savings Deposits
30
Long-term securities
10
Long-term CDs
10
a. Calculate the income gap.
b. If interest rates suddenly increase by two percentage points,
will First Bank’s profits (net interest income) increase or
decrease, and by how much? Show calculations.
c. If, instead, interest rates were to drop by three percentage
points, what will be the change in First Bank’s profits (net

2. interest income)? Show calculations.
d. Repeat parts b and c to calculate the changes in interest rate
margin in each case.
e. Suppose the bank decides to convert $25mln of its variable
CDs to long-term CDs. How would an increase of interest rates
by 2% affect on the interest margin and income in this case?
Would this increase or decrease interest rate risk? Explain!
Show calculations.
Assets
Liabilities
2. The average duration of the assets and the liabilities are 1.16
and 2.77, respectively, for XYZ Company. Assuming they
cannot do anything to the average duration of the liabilities,
how (calculate the new value for average duration of assets) can
they alter the average duration assets to ensure that any
fluctuation of interest rates does not affect the value of net

3. worth as a percentage of assets? Show all calculations.
3. (Duration Gap Analysis) XYZ Bank has total asset value of
$200 million, and total liability value of $180 million. The
average duration of assets is 2.5, and the average duration of
liabilities is 1.1.
a. What is the duration gap for XYZ bank?
b. What is the change in the market value of net worth as a
percentage of assets if interest rates fall from 6% to 5%? Show
calculations.
c. Would you get the same results if you were to calculate the
change in the market value of the assets (%ΔPA) and liabilities
(%Pll.)? Show calculations.4. (Open Market Operations) One of
the ways the Bank of Canada exercises control over the
monetary base is through its purchases and sales of government
securities in the open market, called open market operations.
a) How will a Bank of Canada sale of $100 of government
bonds to the nonblank public affect the monetary base and
reserves if the nonblank public pays for the bonds with
cheques? Fill in the following T-accounts in arriving at your
answer. Clearly mention what asset and/or liability item will be
affected, the direction of the change ((+) or (-)) and the dollar
amount of the change.
Nonbank Public
Assets
LiabilitiesBanking System
Assets
LiabilitiesThe Bank of Canada
Assets
LiabilitiesChange in monetary base = --------------$
Change in reserves = --------------$
b) How will a Bank of Canada sale of $100 of government
bonds to banks affect the monetary base and reserves? Fill in
the following T-accounts in arriving at your answer. Clearly

4. mention what asset and/or liability item will be affected, the
direction of the change ((+) or (-)) and the dollar amount of the
change. Follow the instructions provided in part a).Banking
System
Assets
LiabilitiesThe Bank of Canada
Assets
LiabilitiesChange in monetary base = --------------$ Change
in reserves = --------------$
c) How will a Bank of Canada sale of $100 of government
bonds to the nonbank public affect the monetary base and
reserves if the nonbank public pays for the bonds with
currency? Fill in the following T-accounts in arriving at your
answer. Follow the instructions provided in part a).
Nonbank Public
Assets
LiabilitiesThe Bank of Canada
Assets
LiabilitiesChange in monetary base = --------------$
Change in reserves = -------------
5.Spillover Effects of US Credit Crunch
The blame of the recent financial turmoil goes to the
phenomenon of “securitization”. Explain how this phenomenon
would create such a pandemic across the world.
(Hint: Refer to class discussion, watch the video posted under
content, do your diligent research (there are lots of documents
on this topic. Try to connect together the lack of financial
regulation to the eventual collapse of the system. For example,
try to explain how subprime lending could have happened, how
lenders packaged those assets (mortgages) with other assets and
sold to others, how banks’ assets lost value, what was the role
of low capital/asset ratio, how governments bailed big banks
out, why? Etc.)). Also incorporate mortgage backed securities,
collateralized debt obligations, credit default swaps, etc.

5. This is an essay question. There is no length requirement but
your discussion must be coherent enough to cover the main
concepts and facts we discussed in class.
6