The following information relates a commercial bank as at December 31, 2020 Rate sensitive Asset $70m Rate sensitive Liabilities $30m Fixed rate assets $30m Fixed rate liabilities $30m Assume the duration of the assets is 5 years and that of its liabilities is 2 years. Assume the interest rates are initially 10%.

a) Calculate the Net worth of the Bank

b) Interest rates increased from 10% to 15% what will happen to the income of the bank? Use gap analysis to explain and show calculation.

c) If interest rates decreased from15% to 5% calculate the change in the market value of the net worth as a percentage of total assets. Explain using gap analysis.

d) Assume that the bank manager is expecting a further decrease in the interest rates, and he decided to make the duration of the asset longer to mitigate interest rates risk. Would you agree with him? Why or why not? Explain.