A bank invested $70 million in a three-year asset paying 12 percent interest per year and simultaneously issued a $50 million, one-year liability paying 8 percent interest per year. The liability will be rolled over after one year at the current market rate.

a. What will be the impact on the banks net interest income if at the end of the first year all interest rates have increased by 1 percent (100 basis points)?

b. The bank decided to issue one-year liability at the end of the first year (or beginning of the second year). The liability will have to be rolled over again at the end of the second year. What will be the impact on the banks net interest income if at the end of the second year all interest rates have decreased by 3 percent (300 basis points)?

c. Is the bank facing refinancing risk, reinvestment risk or both? Justify your answer.