Question 4 Balance Sheet Assets Rate sensitive assets Fixed rate assets $10 million $110 million Liabilities Rate sensitive liabilities Fixed rate liabilities $100 million $20 million (a) If interest rates fall by 4 percentage points, what is the change in bank profits according to gap analysis? (b) If all assets have an average duration of 5 years and all liabilities have an average duration of 1 year, how does an interest rate decline of 4 percent affect the dollar value of banks net worth according to duration analysis? The bank's capital is $10 million. In this part, assume as we did in class that the change in interest rates affects all assets and liabilities, not just the interest rate sensitive ones. (c) Based on parts (a) and (b), as the strictly profit maximizing manager of the bank, does a decline in interest rates make you want to increase or decrease the duration of your liabilities? Of your assets? Do you think the bank's shareholders, who are liable if the bank fails, have the same perspective? For this part, assume the manager gets a share of the profits but does not face liability if the bank becomes insolvent. Question 4 Balance Sheet Assets Rate sensitive assets Fixed rate assets $10 million $110 million Liabilities Rate sensitive liabilities Fixed rate liabilities $100 million $20 million (a) If interest rates fall by 4 percentage points, what is the change in bank profits according to gap analysis? (b) If all assets have an average duration of 5 years and all liabilities have an average duration of 1 year, how does an interest rate decline of 4 percent affect the dollar value of banks net worth according to duration analysis? The bank's capital is $10 million. In this part, assume as we did in class that the change in interest rates affects all assets and liabilities, not just the interest rate sensitive ones. (c) Based on parts (a) and (b), as the strictly profit maximizing manager of the bank, does a decline in interest rates make you want to increase or decrease the duration of your liabilities? Of your assets? Do you think the bank's shareholders, who are liable if the bank fails, have the same perspective? For this part, assume the manager gets a share of the profits but does not face liability if the bank becomes insolvent