5. (10) Your bank has the following balance sheet sorted by whether the asset or liability is sensitive to interest rate changes. Assets Liabilities Rate-sensitive $300 million Rate-sensitive $400 million Fixed-rate 600 million Fixed-rate 500 million a) If interest rates are expected to decrease by 5 percentage points, say from 8% to 3%, bank profits (measured using gap analysis) will: Answer: Increase/decrease: By $ 6.(10) Assume that the average duration of a bank's assets is four years and the average duration of its liabilities is three years. Assume the bank has the following balance sheet. Assets Liabilities Checkable deposits $200 million Bank capital 50 million Total Assets $250 million Total Liabs and Capital $250 million a) If interest rates are expected to increase by 5 percentage points, say from 2% to 7%, what will be the effect on the net worth of First National? Answer: New value of total assets: New value of bank capital: b) Will the new capital level pose a concem to bank management when considering the capital total asset ratio? Answer: Yes/No: Why