1. As economic conditions change, how do banks adjust their asset portfolio? Research and provide some examples.
2. Assume that a bank expects to attract most of its funds through short-term CDs and would prefer to use most of its funds to provide long-term loans. How could it follow this strategy and still reduce interest rate risk?
3. Assume Merchants National Bank is operating a positive gap of $10 million and they decide to take on $1.5 million of new interest bearing short-term liabilities. After which interest rates subsequently rise from 4% to 7%. What effect will this have on Merchants income?