You are analyzing the exposure of a bank’s income to interest rate risk using the repricing model. You collected the data below on the bank’s liabilities and equity from its balance sheet (all values are in $Millions).

Liabilities and Equity

Equity: 425

Demand Deposits: 1097

Savings Accounts: 708

3-Month CDs: 177

6-Month CDs: 354

2-Year CDs: 354

Fed Funds (overnight): 71

6-Month Commercial Paper: 142

2-Year Debt (Fixed Rate): 212

Liabilities and Equity: 3540

You are analyzing the response of a bank to interest rate changes over a one-quarter horizon after an initial increase in rates. For the purposes of an initial analysis, you decided to assume that savings deposits are not rate sensitive.

Estimate the rate-sensitive assets (RSLs) over this time horizon.

Question

You are analyzing the exposure of a bank’s income to interest rate risk using the repricing model. You collected the data below on the bank’s liabilities and equity from its balance sheet (all values are in $Millions).

Liabilities and Equity

Equity: 425

Demand Deposits: 1097

Savings Accounts: 708

3-Month CDs: 177

6-Month CDs: 354

2-Year CDs: 354

Fed Funds (overnight): 71

6-Month Commercial Paper: 142

2-Year Debt (Fixed Rate): 212

Liabilities and Equity: 3540

You are analyzing the response of a bank to interest rate changes over a one-quarter horizon after an initial increase in rates. For the purposes of an initial analysis, you decided to assume that savings deposits are not rate sensitive.

Estimate the rate-sensitive assets (RSLs) over this time horizon.

BlackTom AI · Accepted Answer

Rate-sensitive liabilities (RSLs) are liabilities that will reprice or mature within the analysis horizon. Over a one-quarter (three-month) horizon, include only instruments that reprice or mature within three months.

Relevant concepts:
- Repricing horizon = 3 months. Only instruments with maturity or repricing ≤ 3 months count as rate-sensitive.
- The problem explicitly states savings deposits are not rate-sensitive for this initial analysis.
- Core / demand deposits are treated here as non-rate-sensitive (the prompt gives no rate-sensitivity for demand deposits, so we exclude them).

Step-by-step identification and calculation:
1. Examine each liability and decide if it reprices within 3 months:
   - Demand Deposits (1097): treated as core/non-rate-sensitive → exclude.
   - Savings Accounts (708): explicitly assumed not rate-sensitive → exclude.
   - 3-Month CDs (177): mature/reprice at 3 months → include.
   - 6-Month CDs (354): reprice at 6 months → exclude.
   - 2-Year CDs (354): >3 months → exclude.
   - Fed Funds (overnight) (71): immediate repricing (overnight) → include.
   - 6-Month Commercial Paper (142): >3 months → exclude.
   - 2-Year Debt (Fixed Rate) (212): fixed long-term >3 months → exclude.
   - Equity (425) is not a liability for repricing purposes → exclude.

2. Sum the included items:
   - 3-Month CDs = 177
   - Fed Funds (overnight) = 71
   - Total RSLs = 177 + 71 = 248

Why this is correct:
- Only instruments that will reprice within the one-quarter horizon are counted; that leaves precisely the 3-month CDs and overnight fed funds. Savings and demand deposits are explicitly or implicitly treated as non-rate-sensitive and longer-term instruments reprice after the horizon, so they are excluded.

Why other options are incorrect (briefly):
- 2053, 956, 3115, 744 all require including items that either are explicitly non-rate-sensitive (savings) or reprice after the 3-month horizon (6-month CDs, 2-year instruments, etc.), so they overstate RSLs for the one-quarter horizon.

Conclusion: The estimated rate-sensitive liabilities (RSLs) over the one-quarter horizon equal 248, matching the provided correct answer.

Similar Questions

The riskiness of an asset’s returns due to interest rate changes is called:

A bank using fixed-rate liabilities to fund variable-rate assets faces the risk of interest rate , and a bank using variable-rate liabilities to fund fixed-rate assets faces the risk of interest rate _.

Which company's valuation is more exposed to interest rate risk, a company which owns a series of rooftop solar installations such as SunNova or SunRun or an E&P company which owns a bunch of oil and gas wells.

In this question, assume all bonds are annual coupon-ed bonds, have the face value of $1,000, have the same credit rating, and are sold at par. Which of the following has the least amount of Interest Rate Risk?

You are analyzing the exposure of U.S. banks’ income to interest rate risk using the intuitions discussed in class. In this context, you considered the statements below. Which of these statements is correct?

A firm chooses short-term finance due to uncertain future interest rates. What trade-off is it accepting?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler