1. Consider a bank 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 bank is 5 percent per year and the return on the assets is 9 percent per year. a. Calculate the bank's profit spread and dollar value of profit in year1

b. Calculate the profit spread and dollar value of profit in year 2, if the bank can reinvest its assets at 9 percent.

C. If interest rates fall and the bank can invest in one-year assets at 6 percent in the second year, calculate the bank's profit spread and dollar value of profit in year2

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

e. Is the bank facing refinancing or reinvestment risk? Why?

1. Consider a bank 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 bank is 5 percent per year and the return on the assets is 9 percent per year. a. Calculate the bank'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 bank can reinvest its assets at 9 percent. c. If interest rates fall and the bank can invest in one-year assets at 6 percent in the second year, calculate the bank's profit spread and dollar value of profit in year 2. d. If interest rates rise and the bank can invest in one-year assets at 11 percent in the second year, calculate the bank's profit spread and dollar value of profit in year 2. e. Is the bank facing refinancing or reinvestment risk? Why? 2. Consider the simple bank balance sheet below (in millions of dollars)