1. Given the following balance sheet, analyze the banks interest rate risk by answering the questions below. Dollars are in millions.

Assets		Liabilities and Equity
Cash	$ 7.50	Demand deposits	$ 65.20
3-month T-bills (0.35%)	42.70	1-month CDs (0.25%)	43.80
6-month T-bills (0.50%)	37.60	1-year CDs (1.00%)	58.20
5-year T-bonds (1.65%)	82.90	3-year CDs (1.76%)	52.30
1-year business loans (3.25%)	53.80	5-years CDs (2.56%)	57.60
5-year business loans, (4.25% fixed rate)	73.40	Long-term debt (4.05% fixed rate)	102.40
15-year mortgages, floating rate (3.87%, reset every 6 months)	98.30	Equity	23.90
Premises	7.20
Total Assets	$ 403.40	Total Liabilities and Equity	$ 403.40

a. Calculate the banks net interest income (NII).

b. Calculate (i) the one-year repricing gap (CGAP) and (ii) the gap ratio for the bank.

c. Use the repricing gap model to estimate the change in net interest income (NII) if interest rates are expected to increase by 150 basis points next year. Assume that the spread between rates on assets and liabilities remains constant.

d. Estimate NII if interest rates on rate-sensitive assets increase by 140 basis points and interest rates on rate-sensitive liabilities increase 160 basis point.

e. Given your estimates from c and d, comment on the banks interest rate risk exposure based on (i) the CGAP effect and (ii) the spread effect.