The following is City Bank T account

Assets Liabilities and Capital

Rate sensitive Assets Rate Sensitive Liabilities

$100 $75

1. Assuming a decrease of 5% in interest rates (from 10% to 5%) 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 2 years for the rate sensitive liabilities.

2. What if interest rates increased by 3% (from 10% to 13%).

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