Choose three (3) of the following questions (questions are 13 points each). Please show all your calculations for the Problems.

1. Find and post below the following three charts:

The most recent (any day the week of 4/5/2021) and the 1-Year Ago Treasury Yield Curve;

The 10-Year Breakeven Inflation Rate (from April 1, 2020 to the most recent date); and

The 10-Year Treasury Constant Maturity Minus 3-month Treasury Constant Maturity (from April 1, 2020 to the most recent date).

Discuss:

By how much has inflation expectation changed from one year ago? Is this reflected in the Yield Curve?

Does the recent increase in Long-term rates indicate optimism about future growth, or concern about inflation? Explain.

What might the 10-Year to 3-month Treasury Spreads portend for bank profitability in 2021 vs. 2020? Explain.

Given the Fed’s avowal to continue with QE for now, discuss possible reasons for the rise of long-term rates in 2021.

2. A bank buys a large block of $1,000 par value, 30-year, 8% coupon bonds for $980 per bond. The bank plans to hold it for three years and estimates that markets required rate of return for the bond in three years should be 5%. (Show all your calculations.)

What is the bond’s current YTM?

What is the expected selling price for the bonds in three years?

What holding period yield (HPY) will the bank earn if it buys the bonds today and can sell them at the expected price (based on the predicted YTM of 5%)?

3. Banks have at their disposal different asset-liability management strategies to deal with interest rate risk. Discuss the following items:

Describe the two types of risks that changes in interest rates can lead to for a bank. Use examples to illustrate.

Explain the concept of IS Gap management. Which kind of risk does it address? How do banks typically implement this strategy?

Explain the concept of Duration Gap management. Which kind of risk does it address? How do banks typically implement this strategy?

Discuss how Securitization and Credit Swaps can be used to manage interest rate risks.

4. Rockefeller Bank, NA, has $200 million of bonds with a duration of 6 years, commercial loans of $600 million with a duration of 4 years, and $400 million of consumer loans with a duration of 5 years. It has funded itself with $600 million of deposits with an average duration of 2 years, and $400 million of volatile liabilities with a duration of 0.75 years. (Show all your calculations.)

Compute Rockefeller’s Duration Gap.

Suppose interest rates go up 50 basis points from current rates of 4.0%. What is the likely impact on the bank’s Net Worth?