Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.

If the Friendly Finance Company raises an additional $20 million with commercial paper and uses the funds to make $20 million of consumer loans that mature in less than one year, what happens to its interestrate risk? In this situation, what additional changes could it make in its balance sheet to eliminate the income gap?

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Cash and deposits Securities Assets Less than 1 year 1 to 2 years Greater than 2 years Consumer loans Less than 1 year 1 to 2 years Greater than 2 years Physical capital Total Friendly Finance Company $3 million $5 million $1 million $1 million $50 million $20 million $15 million $5 million $100 million Liabilities Commercial paper Bank loans Less than 1 year 1 to 2 years Greater than 2 years Long-term bonds and other long-term debt Capital Total $40 million $3 million $2 million $5 million $40 million $10 million $100 million