For simplicity, assume that a bank currently has the following balance sheet.

Assets	Value	Duration (in years)	Liabilities	Value	Duration (in years)
T-Bill	50,000,000	0.5	Long-term bonds	50,000,000
T-Note	50,000,000	2.5	Net Worth	50,000,000

You are considering to issue $50,000,000 long-term bonds to meet its funding requirements among the following three bonds available for possible change in future interest rate.

Bond I: 3-year zero-coupon bonds yielding 5%

Bond II: 5-year 5% coupon bonds yielding 5%

Bond III: 4-year fixed payment bonds yielding 5%

• 1.Calculate Macaulay duration of each bond.
• 2.Calculate duration gap when each bond is selected respectively.
• 3.Ifyoubelieveinterestratetoincreaseby1percentto6%,whichoneamongtheabovethreepossiblebondsshouldyouchoosetoincreasethebank'snetworthandwhatistheexpectedchangeinthebank'snetworth?