bank with a two$-$year horizon has issued a one$-$year certificate of deposit for $$60$ million at a variable interest rate of $2$ percent. With the proceeds, the bank has purchased a two$-$year Treasury note that pays $5$ percent interest.

What risk does the bank face in entering into these transactions?

Instructions: Enter numeric responses as whole dollar values.

The bank faces the risk that the short$-$term interest rate will

rise

before the second year,

increasing

the amount of interest the bank has to pay on the CD$,$ but leaving the interest income that the bank receives from the Treasury note unchanged. With an interest rate of $2$ percent for the CD and $5$ percent for the Treasury note, the bank$$s annual interest income is $

million and the bank$$s annual interest expenses are $

million. The bank makes a profit of $

million.

What would happen if all interest rates were to rise by $1$ percent?

If the interest rate rises $1$ percent, the bank's profit in the second year falls to $

million.