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National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. Assets Amount ($ millions) Annual

National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.

Assets

Amount ($ millions)

Annual Rate

Liabilities

Amount ($ millions)

Annual Rate

1-year bonds

$60

7%

1-year CD

$50

5%

10-year loan

$40

12%

2-year CD

$40

6%

Equity

$10

Total

$100

Total

$100

a. What is market value of the ten-year loan if all market interest rates increase by 2 percent?

b. What is market value of the two-year CD if all market interest rates increase by 2 percent?

c. What is the impact on the FI's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments? Briefly discuss your results.

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