The following is City Bank T account

Assets Liabilities and Capital

Reserves $20m deposit $90

loans $80m Capital $10

1. Assuming an increase of 2% in interest rates (from 10% to 12%) for both assets and liabilities, calculate the change in the market value of the net worth as a percentage of total assets. Assume average duration of 4 years for the rate sensitive assets, and average duration of 6 years for the rate sensitive liabilities.

1. What if interest rates decreased by 2% (from 12% to 10%).

1. What strategy should the Bank Manager follow to alleviate the risk of interest rates increase?