Suppose that you know the following about a bank:

Total assets = $150 million

Liabilities = $125 million

Bank capital=$25 million

Average duration of assets is 3 years while average duration of liabilities is 4 years. The banks have $75 million in rate sensitive assets and $50 million in rate sensitive liabilities

Question 1) Use Duration Analysis to show how exposed the bank is to interest rate risk by assuming that the interest rate rises by 1%. Show all work (all calculations)

Question 2) Use the Gap Analysis to show how exposed the bank is to interest rate risk [again consider a rise in interest rate by 1%]. Show all work/calculations