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Consider a bank with the following balance sheet:

Assets ($millions)	Liabilities ($millions)
Reserves	$35	Zero-interest checking	$50
Variable-rate loans	$170	3-month CDs	$100
Fixed-rate loans	$75	10-year CDs	$175
3-month Treasury	$50	Bank Capital	$____
10-year Treasury bonds	$25

a) What is the bank capital?

b) Find the bank's (basic) gap.

c) Suppose spot interest rates fell by 2 percentage points. What would happen to the bank's profits? (Assume that interest rates on variable-rate assets and liabilities change instantly.)

d) What actions could you take to reduce the bank's interest-rate risk?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9799323

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