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Suppose that a bank has 10 billion of one-year loans and 30 billion of five-year loans. These are financed by 35 billion of one-year deposits
Suppose that a bank has 10 billion of one-year loans and 30 billion of five-year loans. These are financed by 35 billion of one-year deposits and5 billion of five-year deposits. The bank has equity totaling 2 billion and its ROEis currently 12%.
a)Calculate Net Income
b)Focusing on 5-year maturities, estimate what change in the official bank interest rate next year would lead to the bank's return on equity being reduced to zero. Assume that the bank is subjected to a tax rate of 30%.
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