The management of Richmond State Bank has asked you to examine the interest rate risk of the bank. Management is concerned that interest rates will increase by the end of the year and wants to see what would happen to the relative profitability of the bank if the increase actually occurs. The Balance Sheet at December 31, 2018 is attached to this project and presented in the accompanying Excel file. Also provided are the durations for the assets and liabilities. Other information you may need for your analysis is:

1) 10% of Fixed-rate mortgages mature within the next year.

2) 15% of Checkable deposits and 22% of Savings deposits are rate sensitive.

3) Reserves at the Fed DO earn interest and are considered a rate sensitive asset.

4) Current market rates are 4%.

Richmond State Bank
Balance Sheet at December 31, 2018
			Amount	Duration
			($ millions)	(years)
Assets
Cash and Cash items			$8.00	0.00
Reserves at Fed			3.00	0.00
Securities:
Less than 1 year			41.00	0.40
1 - 2 years			3.00	1.60
Greater than 2 years			8.00	4.16
Residential mortgages:
Variable-rate			30.00	0.40
Fixed-rate (30 years)			15.00	10.30
Commercial loans:
Less than 1 year			47.00	0.90
1 - 2 years			36.00	1.80
Greater than 2 years			25.00	15.00
Building and Equipment			10.00	0.00
Other Assets			1.00	0.00
Total Assets			$227.00
			Amount	Duration
			($ millions)	(years)
Liabilities
Checkable deposits			$9.00	1.00
Money market demand accounts			8.00	0.80
Savings deposits			20.00	1.00
Certificates of deposit:
Variable-rate			52.00	0.90
Less than 1 year			21.00	0.30
1 - 2 years			17.00	1.80
Greater than 2 years			4.00	8.00
Fed funds borrowed			15.00	0.01
Borrowings:
Less than 1 year			40.00	0.40
1 - 2 years			9.00	1.20
Greater than 2 years			26.00	12.00
Other liabilities			1.00	0.00
Total Liabilities			$222.00
Equity Capital			$5.00
Total Liabilities and Equity			$227.00

Scenario 1: Suppose you decide to insulate the bank by attracting and issuing fixed-rate 5-year CDs with a duration of 4.60 years and investing those funds in 90-day T-bills with a duration of 0.25 years.

1. Show the new balance sheet.
2. What is the dollar amount of CDs/T-bills that you must issue/buy to bring ISGAP = 0?
3. Now, what is your DGAP of capital?

d. Explain the pros and cons of this banks action.

Scenario 2: Suppose you decide to immunize the bank by issuing long-term debt of $30 million with a duration of X years and using those funds to make variable-rate loans with a duration of 0.50 years.

1. Show the new balance sheet.
2. What is the duration of the long-term debt that you must issue to bring DGAPK = 0?

c. Now, what is your ISGAP?

d. Explain the pros and cons of this banks action.

(Please show work thanks)