The following is the structure of Balance Sheet of Dempsey Bank Ltd:

Using the following assumptions on the runoff cash flows.

1) Fixed-rate mortgages repaid during the year is 20%;

1. 2) Variable-rate commercial loans repaid during the year is 30%;

2. 3) Proportion of savings deposits that are rate-sensitive is 25%.

Required: a) Perform a basic gap analysis on risk sensitive assets and liabilities.

2. b) What will be the net interest income at the year-end if interest rate increases by 1 percent, from 8 percent to 9 percent per annum?

   1. 1) What happens to the income, if the Bank decides to convert $45 m of its existing fixed-rate mortgages into variable-rate mortgages?

   2. 2) What happens to the income, if the Bank revises the estimate of the percentage of the saving deposits that are rate-sensitive from 25% to 15%?

3. c) If a CEO of Dempsey Bank Ltd was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the banks six-month repricing gap to take advantage of this anticipated rise? What if the manager believed rates would fall in the next six months.

Value ($m) 60 75 90 60 15 300 Assets Variable-rate Mortgages Fixed-rate Mortgages Fixed-rate Commercial Loans Variable-rate Commercial Loans Properties Total Assets Liabilities Money Market Deposits (