Consider an FI that issues $200 million of liabilities with two years to maturity to finance the purchase of $200 million of assets with a one 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 9 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 reinvest its assets at 9 percent.

c. If interest rates fall and the FI can invest in one-year assets at 6 percent in the second year, calculate the FI’s profit spread and dollar value of profit in year 2.

d. If interest rates rise and the FI can invest in one-year assets at 11 percent in the second year, calculate the FI’s profit spread and dollar value of profit in year 2.