First Federal Bank (Millions)

Assets Liabilities

Cash and Deposits 5.00 Chequable Deposits 15.00

Investment. Secs 15.00 Time Deposits (2 Year) 10.00

Loans

Consumer 1 year 25.00 Money Market (1 year) 10.00

Consumer 1to2 Yrs 5.00 Capital Market

Mortgages 25yrs 15.00 Greater than 2Yrs 15.00

Central Bank Advances

Greater 2 years 15.00 (Less than 1 year) 15.00

Capital 35.00

Physical Capital 20.00

Total Assets 100.00 Total Liabilities 100.00

Securities are all less than one year. Chequable Deposits pay interest and include $10million under one year (Interest bearing) and 5 million 1 to 2 years. Assume that 20% of mortages have a one year prepayment.

NB 1) Rate Sensitive Assets and Liabilities are one year orless. The current Interest Rate is 10% per annum.

Using Gap Analysis

Showing all calculations

1)Revise the balance sheet to reflect the changes noted above

2)What is the income gap between Rate Sensitive Assets and Liabilities. If interest rates increase by 2.0 % per annum overnight how much will the increase affect profits overnight

3) In no more that 100 words explain the concept of Duration gap analysis in assisting banks to manage interest rate risk