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Alexander Bank has the following list of entries on its balance sheet. All figures are in million dollars: - Reserves $10 - Chequable deposits $60

Alexander Bank has the following list of entries on its balance sheet. All figures are in million dollars:

- Reserves $10

- Chequable deposits $60

- Loans $60

- Capital $20

- Securities $30

- Borrowings $20

  1. The manager estimates the average duration of assets to be 4 years, and average duration of liabilities to be 1 year. Now market interest rate falls from 4% to 2.5%. How would this bank'snet worthchange? Show your calculation for full mark.
  2. Suppose the bank's rate-sensitive assets are $30m, and rate-sensitive liabilities are $60m. What will happen to itsprofitwhen the market interest rate falls from 4% to 2.5%? Show your calculation for full mark.

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