Consider an FI that issues $100 million of liabilities with one year to maturity to finance the purchase of $100 million of assets with a two-year maturity. Suppose that the cost of funds (liabilities) for the FI is 5 percent per year and the interest return on the assets is 8 percent per year.

a. Calculate the FI’s profit spread and dollar value of profit in year 1.

b. Calculate the profit spread and dollar value of profit in year 2 if the FI can refinance its liabilities at 5 percent.

c. If interest rates rise and the FI can borrow new one-year liabilities at 9 percent in the second year, calculate the FI’s profit spread and dollar value of profit in year 2.

d. If interest rates fall and the FI can borrow new one-year liabilities at 3 percent in the second year, calculate the FI’s profit spread and dollar value of profit in year 2.