Consider the following summarised balance sheet and associated average interest rates for RBK bank over a one-year time frame: Liabilities and Equity Rate sensitive Fixed rate Non-paying liabilities and equity Total Assets Rate sensitive 51,500 Fixed rate Amount Rate 2.5% 3.5% Amount 46,000 91,000 Rate 80,000 0.7% 1.9% Non-earning 13,500 8,000 Total 145,000 Unit: Thousand GBP. 145,000 a) Explain interest rate risk and how it arises from a bank's perspective with specific reference to the 2007-09 financial crisis. b) Present the basic steps in static GAP analysis. What is the objective of each step? c) Calculate RBK bank's (i) GAP, (ii) expected net interest income, and (iii) net interest margin if interest rates and portfolio composition remain constant during the year. d) Calculate the change in expected net interest income and net interest margin if the entire yield curve shifts 2 percent higher during the year. Comment on your answer and its implications for RBK bank's GAP. Is this outcome consistent with RBK bank's static GAP?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
![Consider the following summarised balance sheet and associated average interest rates for RBK
bank over a one-year time frame:
Liabilities and Equity
Rate sensitive
Fixed rate
Non-paying liabilities and
equity
Total
Assets
Rate sensitive 51,500
Fixed rate
Amount
Rate
2.5%
3.5%
Amount
46,000
91,000
Rate
80,000
0.7%
1.9%
Non-earning
13,500
8,000
Total
145,000
Unit: Thousand GBP.
145,000
a) Explain interest rate risk and how it arises from a bank's perspective with specific
reference to the 2007-09 financial crisis.
b) Present the basic steps in static GAP analysis. What is the objective of each step?
c) Calculate RBK bank's (i) GAP, (ii) expected net interest income, and (iii) net interest
margin if interest rates and portfolio composition remain constant during the year.
d) Calculate the change in expected net interest income and net interest margin if the entire
yield curve shifts 2 percent higher during the year. Comment on your answer and its
implications for RBK bank's GAP. Is this outcome consistent with RBK bank's static GAP?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ffe17cd79-4564-4c51-958f-a871ce15295b%2F889b7df1-6e98-4088-9449-15419c452af8%2Fryclk3_processed.png&w=3840&q=75)
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