Q3. Gunnison Bank has issued a 9 month, $3 million CD paying 9 percent to fund 9 months loan paying an interest rate of 6.75 percent. The principal of the loan will be paid in three installments: $1million in first 3 months, $1million in next 6 months and the balance at the end of the 9 months.

a. What is the maturity gap of Bank?

b. Assuming no change in interest rates over the year, what is the expected net interest income at the end of the year?

c. What would be the effect on annual net interest income of a 3 percent interest rate increase that occurred immediately before the loan was made? What would be the effect of a 3 percent decrease in rates after the loan was made?

d. What do these results indicate about the ability of the maturity model to immunize portfolios against interest rate exposure?

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