7. (a) Compare and contrast income gap and duration gap analysis as techniques for management of interest rate risk by banks. (12 marks) (b) Consider the following balance sheet of Fairview Bank: Duration 8.3 Duration 1.1 3700 7.1 4200 3.2 Assets () Variable-rate 1900 mortgages Fixed-rate 1500 mortgages Commercial 6500 loans Physical capital 2900 Liabilities Money market deposits Savings deposits Variable-rate CDs Equity 5.0 2200 1.5 2700 Total 12800 Total 12800 What will be the change in net interest income at the year-end if interest rates decrease by 0.5 per cent, from 4 to 3.5 per cent? Explain using basic gap analysis. (Use the following assumptions for runoff cash flows: fixed-rate mortgages repaid during the year. 15 per cent, proportion of savings deposits and variable-rate CDs that are rate-sensitive: 15 per cent). (7 marks) (c) Calculate the duration gap for Fairview Bank? Explain why a bank will normally have a duration gap greater than zero. (6 marks) 7. (a) Compare and contrast income gap and duration gap analysis as techniques for management of interest rate risk by banks. (12 marks) (b) Consider the following balance sheet of Fairview Bank: Duration 8.3 Duration 1.1 3700 7.1 4200 3.2 Assets () Variable-rate 1900 mortgages Fixed-rate 1500 mortgages Commercial 6500 loans Physical capital 2900 Liabilities Money market deposits Savings deposits Variable-rate CDs Equity 5.0 2200 1.5 2700 Total 12800 Total 12800 What will be the change in net interest income at the year-end if interest rates decrease by 0.5 per cent, from 4 to 3.5 per cent? Explain using basic gap analysis. (Use the following assumptions for runoff cash flows: fixed-rate mortgages repaid during the year. 15 per cent, proportion of savings deposits and variable-rate CDs that are rate-sensitive: 15 per cent). (7 marks) (c) Calculate the duration gap for Fairview Bank? Explain why a bank will normally have a duration gap greater than zero. (6 marks)