Financial Gap-Commercial Bank



Assess the following bank’s liquidity situation:




. Suppose that Florida Bank has recently granted a loan of $2 million to Oyster Farms at

LIBOR plus 0.5 percent for six months. In return for granting Oyster Farms an interest-

rate cap of 6.5 percent on its loan, this bank has received from this customer a floor rate on

the loan of 5 percent. Suppose that, as the loan is about to start, LIBOR declines to 4.25

percent and remains there for the duration of the loan. How much (in dollars) will Oyster

Farms have to pay in total interest on this six-month loan with floor and without floor?

How much in interest rebates will Oyster Farms have to pay due to the fall in LIBOR?




1. Does this bank have any core deposits? If so, how much?



2. What is this bank’s financing gap? Briefly interpret this number.



3. Does this bank have any purchased liquidity? If so, how much?

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