A financial institution has the following balance sheet structure:

Assets

Cash

Bond

Real Estate Total

USD million Liabilities

10 Equity

100 Certificate of Deposit

20

130 Total

USD million

30 100

130

The USD 100 million bond has a three year maturity paying 10 percent interest per year. The USD 100 million certificate of deposit has a two-year maturity and paying 8 percent interest per year. The bond and certificate of deposit will be rolled over after their maturities at the respective prevailing market rates. The financial institution expects no additional asset growth.

a) What will be the financial institution's net interest income (NII) over the five-year investment horizon if the interest rate decreases by 1 percent per annum after the first year and decreases by 1 percent per annum after the third year?

b) What will be the financial institution's net interest income (NII) over five-year investment horizon if the interest rate increases by 1 percent per annum after the second year and increases by 1 percent per annum after the fourth year?