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Assume that Royal Bank has $15 million of fixed-rate assets, $30 million of rate-sensitive assets, $15 million of fixed-rate liabilities, $25 million of rate-sensitive liabilities,

Assume that Royal Bank has $15 million of fixed-rate assets, $30 million of rate-sensitive assets, $15 million of fixed-rate liabilities, $25 million of rate-sensitive liabilities, 10 million of demand deposit, 10 million of securities, and 5 million of reserves. Assume that the desired reserve is 20%.

  1. Reflect the above information in a T account. How much is the Net worth?
  2. Calculate the desired reserve and the excess reserve if any,
  3. Conduct a gap analysis for the bank by showing what will happen to bank income if interest rates rise by 4%, from 10% to 14%?
  4. What would happen if the interest rates fell by 4%, from 14% to by 10%?
  5. What actions should the bank manager take if interest rates are expected to fall?

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