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Chapter 8 ASSET-LIABILITY MANAGEMENT

Asset-Liability Management

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A Look At FNMA’s Balance Sheet December 31, 1995 Billion Dollars __________________________________________________________ Assets: Liabilities and S/Hs’ Equity: Mortgage Portfolio Investments Cash & Rec. & Other Other Total 253 57 3 4 317 Short-term bonds Long-term bonds Other Debt EQUITY Total 146 153 7 11 317

Question: What happens if the Mortgage Portfolio loses its value by 11 billion dollars? In other words, if the mortgage portfolio loses its value by ___________%, then FNMA will lose all its equity!

Asset-Liability Management

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A Look at FNMA’s Income Statement For the Period December 31, 1994 - December 31, 1995 (in Billion $)

Interest Income: Mortgage Portfolio Investments Total Interest Expense: Short Term Long-Term Total Net Interest Income Other Income Other Expenses Income Before Taxes

(In Billion $) 18 3 21

In percent 7.85 % 6.155 7.56

4 14 18 3 1 1 3

5.855 7.0575 6.7525 0.8075 Investment Spread

Asset-Liability Management

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Funds-Gap Analysis Focus is on evaluating the impact of changes in interest-rates on net interestincome. The analysis is “maturity based.” Hence, it can be considered as the worst assetliability management tool. There is one side benefit in learning the Funds-Gap Analysis. It is a nice tool to demonstrate how changes in market yields cut through the balance-sheet and affects the income statement. Specifically, for example, it can show us the source of $3 billion accounting profit FNMA reported for the year ending 1995. To undertake the analysis, the first step is to partition the balance sheet into four quadrants: ________________________________________________________ | Rate Sensitive Assets | Rate Sensitive Liabilities (RSA) | (RSL) | | Fixed Rate Assets | Fixed Rate Liabilities (FRA) | (FRL)

Asset-Liability

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