Assume that you have been granted a charter to open a bank with an initial capitalization of $1,000,000. Before you begin to build a loan portfolio and take deposits and/or borrow funds, you have the following liquid investment alternatives for your equity funds:

Current Annual Rates of Return, t=0
Cash	0%
1-Year U.S. Treasury Bills	0.16%
5-Year U.S. Treasury Notes	0.68%
15-Year U.S. Treasury Bonds	1.66%

In this scenario, you face only interest rate risk. There is no credit or default risk and no liquidity risk on U.S. Treasury securities. In order to maximize your profitability you will want to maximize the interest income you earn from your allocation net of any gains or losses in the value of securities due to interest rate changes. In this round and future rounds we are assuming no payments to shareholders, who have provided the initial equity. In this round we are also assuming no liabilities, so there is no interest expense. As a result, your banks profitability in the first round will be its interest income net of any gain or loss to the value of the Treasury securities held.

In these scenarios we will assume 7 possible outcomes with probabilities that approximate a normal distribution and variability up to 3 standard deviations.

In Round 1, the possible scenarios of future interest rates at the end of one year and their associated probabilities are follows:

Outcomes	Outcome Probability	Cash	1-Year U.S. Treasury Bills	5-Year U.S. Treasury Notes	15-Year U.S. Treasury Bonds
1	16.67%	No Change	No Change	No Change	No Change
2	25	No Change	0.36%	0.88%	1.86%
3	25	No Change	0.06%	0.58%	1.56%
4	13.89	No Change	No Change	0.78%	1.86%
5	13.89	No Change	No Change	0.58%	1.46%
6	2.78	No Change	0.50%	0.58%	0.75%
7	2.78	No Change	0.75%	0.68%	0.50%

Please note that any variability in future interest rates involves changes in the U.S. Treasury yield curve as follows:

Outcome 1: No change

Outcome 2: Upward shift by 20 basis points (bp) in all securities

Outcome 3: Downward shift by 10 bp in all securities

Outcome 4: Upward increase in the slope of the Treasury yield curve

Outcome 5: Decrease in the slope of the Treasury yield curve

Outcome 6: Flattening of the Treasury yield curve

Outcome 7: Inversion of the Treasury yield curve

The outcome will be determined by your instructor and advised to you after Round 1 submissions.

Based on the possible outcomes, allocate your initial equity of $1,000,000 among the asset possibilities provided in the initial balance sheet below:

Balance Sheet t=0: Start of Round 1
Assets		Liabilities and Shareholders Equity
Cash		Liabilities	$0
1-Year U.S. Treasury Bills		Common Stock	$1,000,000
5-Year U.S. Treasury Notes		Retained Earnings	$0
15-Year U.S. Treasury Bonds		Total Shareholders Equity	$1,000,000
Total Assets	$1,000,000	Total Liabilities and Shareholders Equity	$1,000,000

Of course, make sure Total Assets = Total Liabilities and Shareholders' Equity = $1,000,000.

In a single type-written page (approximately 250 words, double-spaced) provide the rationale for your initial allocation of risk capital. Include in your assessment the risks associated with your allocation.