(a) Consider the following balance sheet of Banco Agricultural: Assets (K) Duration (years) Variable rate mortgages 300 7.2 Fixed rate mortgages 200 5.0 3 Commercial loans Physical capital Total 600 4.2 250 1350 Liabilities (K) Duration (years) Money market deposits 350 0.9 Savings deposits 200 2.5 Variable rate CDs 150 0.9 Equity 650 Total 1350 = Assumptions Fixed rate mortgages repaid over coming year = 20% Savings deposits that become rate sensitive over the coming year = 25% All commercial loans are rate sensitive All money market deposits are rate sensitive Using income gap analysis, calculate the change in net interest income over the coming year if interest rates increase by 1% from 3% to 4% (6 marks) (b) Discuss the advantages and limitations of income gap analysis. (8 marks) (c) What is the Duration Gap for Banco Agricultural? (4 marks) (d) What is the estimated change in the value of equity (in Ks) for Banco Agricultural if interest rates increase by 1% from 4 to 5%? (3 marks) (e) Explain why a bank with a negative duration gap is estimated to see a rise in the value of its equity when interest rates increase. (4 marks) (a) Consider the following balance sheet of Banco Agricultural: Assets (K) Duration (years) Variable rate mortgages 300 7.2 Fixed rate mortgages 200 5.0 3 Commercial loans Physical capital Total 600 4.2 250 1350 Liabilities (K) Duration (years) Money market deposits 350 0.9 Savings deposits 200 2.5 Variable rate CDs 150 0.9 Equity 650 Total 1350 = Assumptions Fixed rate mortgages repaid over coming year = 20% Savings deposits that become rate sensitive over the coming year = 25% All commercial loans are rate sensitive All money market deposits are rate sensitive Using income gap analysis, calculate the change in net interest income over the coming year if interest rates increase by 1% from 3% to 4% (6 marks) (b) Discuss the advantages and limitations of income gap analysis. (8 marks) (c) What is the Duration Gap for Banco Agricultural? (4 marks) (d) What is the estimated change in the value of equity (in Ks) for Banco Agricultural if interest rates increase by 1% from 4 to 5%? (3 marks) (e) Explain why a bank with a negative duration gap is estimated to see a rise in the value of its equity when interest rates increase. (4 marks)