Consider a fixed-rate mortgage loan of $250,000, given today, at the mortgage rate of 4% per annum, compounded semiannually. The amortization period is 20 years and mortgage payments will be made monthly. Suppose the lending bank has raised its own funds by 1-year term deposits on which it will pay 1.2% interest per annum, compounded monthly. After one year from today, the deposit rate on 1-year term deposits is expected to rise to 4.8% per annum, compounded monthly.

a.What type of risk the bank is facing and why?

b.Calculate the net interest income of the bank from the mortgage loan in the first month of the first year.

c.Calculate the net interest income of the bank from the mortgage loan in the first month of the second year.