a) If a bank is falling short of meeting its capital requirements by K1 million, what three

things can it do to rectify the situation? (3 Marks)

b) Suppose that you are the manager of a bank that has K15 million of fixed-rate assets,

K30 million of rate sensitive assets, K25 million of fixed-rate liabilities, and K20

million of rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what

will happen to bank profits if interest rates rise by 5 percentage points. Mention three

actions you could take to reduce the bank's interest-rate risk? (7 Marks)

c) A bank manager wants to know what happens when interest rates rise from 10% to 11%.

The total asset value is K100 million, and the total liability value is K95 million. The

bank manager gets a figure for the average duration of the assets of 2.70 years and an

average duration of liabilities of 1.03 years. Calculate the change in the market value of

the assets and liabilities.