Q2. A bank has the following balance sheet: Assets Avg. Rate Liabilities/Equity Avg. Rate Rate sensitive $550,000 7.75% Rate sensitive $375,000 6.25% Fixed rate 755,000 8.75 Fixed rate 805,000 7.50 Nonearning 265.000 Nonpaying 390,000 Total $1,570,000 Total $1,570,000 Suppose interest rates rise such that the average yield on rate-sensitive assets increases by 45 basis points and the average yield on rate-sensitive liabilities increases by 35 basis points. (a) Calculate the bank's CGAP and gap ratio. (5 marks) (b) Assuming the bank does not change the composition of its balance sheet, calculate the resulting change in the bank's interest income, interest expense, and net interest income. (10 marks) (c) Explain how the CGAP and spread effects influenced the change in net interest income. (5 marks) Q3. (a) Define the concept of duration. What is its economic meaning? How does it differ from maturity? (5 marks) (b) Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par. Principal of $20,000,000 is due at the end of two years. (5 marks) (c) A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest. The duration of this bond is 4.99 years. What will be the new price using the duration model if interest rates increase to 8.5 percent? (10 marks)