Ex7-1: A government bond is currently selling

for $1,195 and pays $75 per year in interest for

14 years when it matures. If the redemption
value of this bond is $1,000, what is its yield to
maturity?
Ex7-2: Suppose the government bond
described in example 1 above is held for five
years and then the savings institution
acquiring the bond decides to sell it at a price
of $940. Can you figure out the average annual
yield the savings institution will have earned
for its five-year investment in the bond?
Ex7-3: A bank holds a 6%, semiannual coupon
bond with a current market price of $988. The
bond has a par value of $1,000 and matures in
10 years. What is the yield to maturity? 
Ex7-4: A bank holds two bonds: A and B. A is a
6%, semiannual coupon bond with a current
market price of $975. B is a 6.3% coupon bond
that pays interest annually and has a current
market price of $990. Both bonds have a face
value $1,000 and mature in 6 years. Which
bond has the higher YTM? 
Ex7-5: Using following information, calculate
the impact of  one percent increase in market
interest rate on the bond price.
Financial Term Today One year later
Market interest rate 3% 4%
Coupon rate 3% 3%
(semi-annual payment)
Face value $1,000 $1,000
Maturity 10 years ?
Price ? ?
YTM 3% ?
Ex7-6: U.S. Treasury bills are available for purchase this
week at the following prices (based upon $100 par value)
and with the indicated maturities:
 
a. $97.25, 182 days.
b. $95.75, 270 days.
c. $98.75, 91 days.
 
Calculate the bank discount rate (DR) on each bill if it is
held to maturity. What is the equivalent yield to maturity
(sometimes called the bond-equivalent or coupon-
equivalent yield) on each of these Treasury Bills?
Ex7-7: First National Bank of Bannerville has posted
interest revenues of $63 million and interest costs
from all of its borrowings of $42 million. If this bank
possesses $700 million in total earning assets, what
is First National’s net interest margin? Suppose the
bank’s interest revenues and interest costs double,
while its earning assets increase by 50 percent.
What will happen to its net interest margin?
Ex7-8: Farmville Financial reports a net interest
margin of 2.75 percent in its most recent financial
report, with total interest revenue of $95 million and
total interest costs of $82 million. What volume of
earning assets must the bank hold? Suppose the
bank’s interest revenues rise by 5 percent and its
interest costs and earnings assets increase by 9
percent. What will happen to Farmville’s net interest
margin?
Ex7-9: Suppose Carroll Bank and Trust reports
interest-sensitive assets of $570 million and interest-
sensitive liabilities of $685 million. What is the bank’s
dollar interest-sensitive gap? Its relative interest-
sensitive gap and interest-sensitivity ratio?
Ex7-10: Peoples’ Savings Bank has a cumulative gap
for the coming year of + $135 million, and interest
rates are expected to fall by two and a half
percentage points. Can you calculate the expected
change in net interest income that this thrift
institution might experience? What change will occur
in net interest income if interest rates rise by one and
a quarter percentage points?
Ex7-11: The cumulative interest rate gap of
Poquoson Savings Bank increases 60 percent from an
initial figure of $25 million. If market interest rates
rise by 25 percent from an initial level of 3 percent,
what changes will occur in this thrift’s net interest
income?
Ex7-12: Sunset Savings Bank currently has the following interest-
sensitive assets and liabilities on its balance sheet with the
interest-rate sensitivity weights noted.
Interest-Sensitive Assets $ Amount Rate Sensitivity Index
Federal fund loans $ 50.00 1.00
Security holdings 50.00 1.20
Loans and leases 350.00 1.45
Interest-Sensitive Liabilities $ Amount Rate Sensitivity Index
Interest-bearing deposits $ 250.00 0.75
Money-market borrowings 90.00 0.95

What is the bank’s current interest-sensitive gap? Adjusting for

these various interest rate sensitivity weights what is the bank’s
weighted interest-sensitive gap? Suppose the federal funds
interest rate increases or decreases 50 basis points. How will the
bank’s net interest income be affected (a) given its current
balance sheet makeup and (b) reflecting its weighted balance
sheet adjusted for the foregoing rate-sensitivity indexes?
Ex7-13: Snowman Bank, N.A., has a portfolio of loans and securities expected to
generate cash inflows for the bank as follows:
Expected Cash Inflows of Annual Period in Which Cash Receipts
Principal and Interest Are Expected
Payments

$1,275,600 Current year

746,872 Two years from today
341,555 Three years from today
62,482 Four years from today
Deposits and9,871
money market borrowings
Five years from todayare expected to require the following
cash outflows:
Expected Cash Outflows of Annual Period during Which Cash
Principal and Interest Payments Must Be Made
Payments

$1,295,500 Current year

831,454 Two years from today
123,897 Three years from today
If the discount rate applicable to the previous cash flows is 4.25 percent, what is
1,005
-----
Four years from today
Five years from today
the duration of the Snowman’s portfolio of earning assets and of its deposits and
money market borrowings? What will happen to the bank's total returns,
assuming all other factors are held constant, if interest rates rise? If interest rates
fall? Given the size of the duration gap you have calculated, in what type of
hedging should Snowman engage?
Ex7-14: A government bond currently carries a yield
to maturity of 6 percent and a market price of
$1,168.49. If the bond promises to pay $100 in
interest annually for five years, what is its current
duration?
Ex7-15: Suppose that a savings institution has an
average asset duration of 2.5 years and an average
liability duration of 3.0 years. If the savings institution
holds total assets of $560 million and total liabilities
of $467 million, does it have a significant leverage-
adjusted duration gap? If interest rates rise, what will
happen to the value of its net worth?
Ex7-16: Stilwater Bank and Trust Company has an
average asset duration of 3.25 years and an average
liability duration of 1.75 years. Its liabilities amount to
$485 million, while its assets total $512 million.
Suppose that interest rates were 7 percent and then
rise to 8 percent. What will happen to the value of
the Stilwater bank's net worth as a result of a decline
in interest rates?
Ex7-17: Given the cash inflow and outflow figures in
Problem 7-15 for Snowman Bank, N.A., suppose that
interest rates began at a level of 4.25 percent and
then suddenly rise to 4.75 percent. If the bank has
total assets of $20 billion and total liabilities of $18
billion, by how much would the value of Snowman’s
net worth change as a result of this movement in
interest rates? Suppose, on the other hand, that
interest rates decline from 4.25 percent to 3.5
percent. What happens to the value of Snowman’s
net worth in this case and by how much in dollars
does it change? What is the size of its duration gap?
Ex7-18: Carter National Bank holds $15 million in
government bonds having a duration of 12 years. If
interest rates suddenly rise from 6 percent to 7
percent, what percentage change should occur in the
bonds’ market price?