A bank with a two-year horizon has issued a one-year certificate of deposit for $50 million at an interest rate of 1 percent. With the proceeds, the bank has purchased a two-year Treasury note that pays 3 percent interest.

What risk does the bank face in entering into these transactions?

Instructions: Enter numeric responses as whole dollar values.

The bank faces the risk that the short-term interest rate will  (Click to select)  rise  fall  before the second year,  (Click to select)  increasing  decreasing  the amount of interest the bank has to pay on the CD, but leaving the interest income that the bank receives from the Treasury note unchanged. With an interest rate of 1 percent for the CD and 3 percent for the Treasury note, the bank’s annual interest income is $______  and the bank’s annual interest expenses are $_______. The bank makes a profit of $_______.  

What would happen if all interest rates were to rise by 1 percent?

If the interest rate rises 1 percent, the bank's profit in the second year falls to $_______.