1. A bank is considering some investment portfolio shifting. In doing so, the bank is considering selling $25 million in 5-year local government bonds with a coupon interest of 5 percent, and purchase $25 million in 5-year state government bonds with a coupon interest of 7 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 $24 million.

Assume that the banks corporate income tax rate is 30 percent.

1. Calculate the TOTAL net effect on the banks earnings in the current full year resulting from the shift. (12 points)

2. Calculate the dollar income tax impact only on the banks gain or loss on sale of the bonds. Your answer must also indicate whether this is a tax benefit or a tax liability. (3 points)