1. Suppose a bank's assets and liabilities have been classified into assets and liabilities that are rate sensitive and those that are not. The data (in millions of dollars) are as follows:

Assets

Liabilities

Rate Sensitive

Short-term securities

35

Rate Sensitive

Variable CDs

20

Variable mortgage

50

Short-term debt

25

Fixed Rate

Long-term securities

5

Fixed Rate

Long-term debt

50

Physical capital

10

Capital (equities)

5

Total

100

Total

100

a) Calculate the effect of a decline of interest rates by 3% on bank income. Clearly indicate the direction (sign) of the change and the unit of measurement.

b) Calculate the effect of a decline of interest rates by 3% on interest margin. Clearly indicate the direction (sign) of the change and the unit of measurement.

c) Supposed the bank management is trying to change the sizes of their assets and liabilities such that the rate change (re decline of interest rates by 3%) produces an interest income of $1.35 million. Fill in the balance sheet to achieve such profit.

Assets

Liabilities

Rate Sensitive

Short-term securities

Rate Sensitive

Variable CDs

Variable mortgage

Short-term debt

Fixed Rate

Long-term securities

Fixed Rate

Long-term debt

Physical capital

Capital (equities)

Total

Total