SETUP FOR QUESTIONS 6: Titan Bank is a community bank and its balance sheet is reported below.[1] The “total equity/total asset ratio" is 9.91 percent ($11.00/$120.00) and is defined as the capital ratio. Assume bank regulators require the capital ratio to be at least 8.00 percent at all times. If the capital ratio falls below 8.00 percent, the bank regulators immediately shut down the bank and fire the managers. Thus, the capital ratio is very important to the managers who are constantly evaluating "what if" scenarios to make sure they are not shut down. Use Titan Bank's balance sheet to evaluate the two scenarios described below. Balance Sheet (as of 12/31/2020 and in millions) Assets Liabilities Assets have a duration of 4.00 years and a yield to maturity of 6.00%. Liabilities have a duration of 1.00 years and a yield to maturity of 3.00%. Total Assets S111.00 Total Liabilities s100.00 Equity Total Equity S11.00 Scenario 2: Federal Reserve actions force an immediate non-parallel shift in the yield curve. The Fed actions result in short-term rates falling to zero, but result in intermediate-term rates rising a little. This means the yield to maturity on Titan Bank's liabilities decreases by 200 basis points, but the yield to maturity on Titan Bank's assets rise by 20 basis points. 6a) Will Titan Bank's total assets increase or decrease in value? Explain your answer. 6b) Will Titan Bank's total liabilities increase or decrease in value? Explain your answer. 6c) What is Titan Bank's "total equity/total asset ratio" after the immediate non-parallel shift in the yield curve? Explain your answer.
SETUP FOR QUESTIONS 6: Titan Bank is a community bank and its balance sheet is reported below.[1] The “total equity/total asset ratio" is 9.91 percent ($11.00/$120.00) and is defined as the capital ratio. Assume bank regulators require the capital ratio to be at least 8.00 percent at all times. If the capital ratio falls below 8.00 percent, the bank regulators immediately shut down the bank and fire the managers. Thus, the capital ratio is very important to the managers who are constantly evaluating "what if" scenarios to make sure they are not shut down. Use Titan Bank's balance sheet to evaluate the two scenarios described below. Balance Sheet (as of 12/31/2020 and in millions) Assets Liabilities Assets have a duration of 4.00 years and a yield to maturity of 6.00%. Liabilities have a duration of 1.00 years and a yield to maturity of 3.00%. Total Assets S111.00 Total Liabilities s100.00 Equity Total Equity S11.00 Scenario 2: Federal Reserve actions force an immediate non-parallel shift in the yield curve. The Fed actions result in short-term rates falling to zero, but result in intermediate-term rates rising a little. This means the yield to maturity on Titan Bank's liabilities decreases by 200 basis points, but the yield to maturity on Titan Bank's assets rise by 20 basis points. 6a) Will Titan Bank's total assets increase or decrease in value? Explain your answer. 6b) Will Titan Bank's total liabilities increase or decrease in value? Explain your answer. 6c) What is Titan Bank's "total equity/total asset ratio" after the immediate non-parallel shift in the yield curve? Explain your answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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![SETUP FOR QUESTIONS 6:
Titan Bank is a community bank and its balance sheet is reported below.[1] The "total equity/total asset
ratio" is 9.91 percent ($11.00/S120.00) and is defined as the capital ratio. Assume bank regulators require
the capital ratio to be at least 8.00 percent at all times. If the capital ratio falls below 8.00 percent, the bank
regulators immediately shut down the bank and fire the managers. Thus, the capital ratio is very important
to the managers who are constantly evaluating "what if" scenarios to make sure they are not shut down.
Use Titan Bank's balance sheet to evaluate the two scenarios described below.
Balance Sheet
(as of 12/31/2020 and in millions)
Assets
Liabilities
Assets have a duration of 4.00 years and a
Liabilities have a duration of 1.00 years and a
yield to maturity of 3.00%.
yield to maturity of 6.00%.
Total Assets
$111.00
Total Liabilities
$100.00
Equity
Total Equity
$11.00
Scenario 2: Federal Reserve actions force an immediate non-parallel shift in the yield curve. The Fed
actions result in short-term rates falling to zero, but result in intermediate-term rates rising a little. This
means the yield to maturity on Titan Bank's liabilities decreases by 200 basis points, but the yield to
maturity on Titan Bank's assets rise by 20 basis points.
6a) Will Titan Bank's total assets increase or decrease in value? Explain your answer.
6b) Will Titan Bank's total liabilities increase or decrease in value? Explain your answer.
6c) What is Titan Bank's "total equity/total asset ratio" after the immediate non-parallel shift in the yield
curve? Explain your answer.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0212e7b8-a081-46c9-8d48-4f245b5f499f%2Feb6af8d1-9c04-4554-8f2f-5dc33cb492cc%2F2htprse_processed.png&w=3840&q=75)
Transcribed Image Text:SETUP FOR QUESTIONS 6:
Titan Bank is a community bank and its balance sheet is reported below.[1] The "total equity/total asset
ratio" is 9.91 percent ($11.00/S120.00) and is defined as the capital ratio. Assume bank regulators require
the capital ratio to be at least 8.00 percent at all times. If the capital ratio falls below 8.00 percent, the bank
regulators immediately shut down the bank and fire the managers. Thus, the capital ratio is very important
to the managers who are constantly evaluating "what if" scenarios to make sure they are not shut down.
Use Titan Bank's balance sheet to evaluate the two scenarios described below.
Balance Sheet
(as of 12/31/2020 and in millions)
Assets
Liabilities
Assets have a duration of 4.00 years and a
Liabilities have a duration of 1.00 years and a
yield to maturity of 3.00%.
yield to maturity of 6.00%.
Total Assets
$111.00
Total Liabilities
$100.00
Equity
Total Equity
$11.00
Scenario 2: Federal Reserve actions force an immediate non-parallel shift in the yield curve. The Fed
actions result in short-term rates falling to zero, but result in intermediate-term rates rising a little. This
means the yield to maturity on Titan Bank's liabilities decreases by 200 basis points, but the yield to
maturity on Titan Bank's assets rise by 20 basis points.
6a) Will Titan Bank's total assets increase or decrease in value? Explain your answer.
6b) Will Titan Bank's total liabilities increase or decrease in value? Explain your answer.
6c) What is Titan Bank's "total equity/total asset ratio" after the immediate non-parallel shift in the yield
curve? Explain your answer.
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