1. A bank is considering issuing $20 million in short-term deposits for a term of 30 days. Currently annual interest rates are 0.21 percent on such deposits, however the bank expects rates on comparable deposits to rise to 0.36 percent during the 30-day period. As a result the bank plans to hedge its position by selling $20 million 2-year Treasury Notes futures contract currently at an index price of 92. Interest rates rise as expected and the bank offsets its position by buying futures contract at 91.95.

1. Calculate the change in dollar interest cost of issuing the deposits if interest rates rise. (5 points)
2. Calculate the pre-tax gain or loss resulting from the futures position. (19 points)
3. Calculate the overall combined pre-tax gain or loss from the cost of issuing deposits and the futures contract. (3 points)

2. A bank is considering some investment portfolio shifting. In doing so, the bank is considering selling $70 million in 5-year county-government bonds with a coupon interest of 3 percent, and purchase $70 million in 5-year city government bonds with a coupon interest of 4 percent issued at par. The local bonds being sold are listed at par on the banks books but they have a current market value of $68 million.

Assume that the banks corporate income tax rate is 20 percent.

1. Calculate the TOTAL net effect on the banks earnings in the current full year resulting from the shift. (12 poin
2. Calculate the dollar income tax impact for the current year. (3 points)