Please help in any way.
Jack Brothers had recently taken over the management of the securities portfolio at Community Bank & Trust a $100 million asset-size bank in a suburb of a
large U.S. city. Previously Jack worked in the loan portfolio of a bank in another state. He had gained favorable recommendations from his prior employers in
large part due to his innovative work in securitizing loans a growing area of management in the banking industry involving the issuance of mortgage backed
securities on home loans. A meeting with CEO George Willis the day before had raised some unsettling evidence concerning the gap management of the bank. The
accounting department reported that while the dollar gap of the bank over the past year was zero with equal dollar holdings of interest rate sensitivity of
assets and liabilities the bank had lost $500000 in interest income over the last year as interest rates had rapidly fallen 300 basis points. Mr. Willis
asked Jack to identify the %u201Cmissing gap%u201D problem that appears to exist and make recommendations in the securities portfolio that would help solve the
problem. He wanted a fast turnaround on these questions with a preliminary report due tomorrow afternoon. He also made clear that according to investment
policy securities portfolio management was a means to effective and efficient asset/liability Management Committee in order to coordinate activities in the
Jack reviewed asset/liability materials that evening in his study at home and decided to go forward with a standardized gap analysis. The short period of time
allowed for the preliminary report required that only a general analysis of the problem be attempted at this stage.
In the morning he visited the accounting department staff who helped him obtain some rough historical figures from the past year on the interest rate
sensitivity of board asset and liability accounts in response to a change of 100 basis points in the prime rate of interest.
It occurred to Jack that the rapid decline in interest rates this past year may imply that interest rates will increase in the future. Consequently he also
checked the financial newspaper in the morning and found that the two-year Treasury rat was 4.0 percent. He estimated that approximately a 50 basis point
liquidity premium likely exists in the two-year bond rate to compensate investors for the added price risk of these bonds relative to the on-year bonds.
Based on standardized gap analysis why did the 300 basis point drop in interest rates so adversely affect the bank%u2019s net interest earnings in the past
How could securities management have reduced or eliminated the recent loss of $500000?
What is the interest rate forecast using expectations and liquidity premium theories of the yield curve?
What are the implications of anticipated future interest rate movements for net interest earnings the bank%u2019s gap position and securities management in
the near future?