Use the following balance sheet (in millions of dollars) for a bank and assume that 20% of fixed-rate mortgages, 10 % of checkable deposits, and 10% of savings deposits are rate-sensitive. Assume all variable-rate mortgages are rate-sensitive. DUR stands for duration.

                        Assets                                                 Liabilities (and capital)

Reserves                      15        DUR = 0         Checkable deposits     125      DUR = 1.5

Securities

            <1 year            35       DUR = .3        Savings deposits         50       DUR = 2.5

            >1 year            70       DUR = 2         CDs

Mortgages                                                                   < 1 year           70       DUR = .5

            Variable-rate    20       DUR = .5                    > 1 year           60       DUR = 1.5

            Fixed-rate        75       DUR = 4         Borrowings

Commercial loans

< 1 year           25       DUR = .25      < 1 year           45       DUR = .8

        Capital                        20            > 1 year           90       DUR = 1.75

Total assets     350                              Total liabilities plus capital     350

Consider assets and liabilities of less than a year to maturity to be rate-sensitive (one-year maturity bucket).

Calculate the repricing (funding) gap for a one-year maturity bucket.

Calculate the change in net interest income in the first year for a decrease in interest rate from 5% to 4% (be sure to note whether income increases or decreases).

Calculate the average duration of assets.

Calculate the average duration of liabilities.

Calculate the leverage-adjusted duration gap.

Calculate the change in net worth (capital) if the interest rate decreases from 5% to 4%?