Use the following balance sheet information of an FI to answer questions 37 - 38. All assets and liabilities are currently priced at par and pay interest annually. Liabilities ($ millions) 5-year 6 percent term deposits 3-year 7 percent interest rate CD Equity Assets ($ millions) 2-year 8 percent loans 3-year 8 percent loans 37) What is the FI's maturity gap? A) -2.03 years B) -2.50 y C) -1.07 years years D) -0.70 years E) -0.40 years $40 $60 $100 38) Is the bank exposed to interest rate increases or decreases and why? A) Interest rate increases because the value of its assets will rise more than its liabilities. B) Interest rate increases because the value of its assets will fall more than its liabilities. C) Interest rate decreases because the value of its assets will rise less than its liabilities. D) Interest rate decreases because the value of its assets will fall more than its liabilities. E) Interest rate increases because the value of its assets will fall less than its liabilities. 39) A major shortcoming of the maturity model is its A) focus on market values. B) neglect of reinvestment income on interim cash flows. $30 $60 $10 $100 C) computational simplicity. D) concern with mismatches on the balance sheet. E) oversimplified assumptions.

Use the following balance sheet information of an FI to answer questions 37 - 38 . All assets and liabilities are currentlv priced at nar and nav interest annuallv. 37) What is the FI's maturity gap? A) -2.03 years B) -2.50 years C) -1.07 years D) -0.70 years E) -0.40 years 38) Is the bank exposed to interest rate increases or decreases and why? A) Interest rate increases because the value of its assets will rise more than its liabilities. B) Interest rate increases because the value of its assets will fall more than its liabilities. C) Interest rate decreases because the value of its assets will rise less than its liabilities. D) Interest rate decreases because the value of its assets will fall more than its liabilities. E) Interest rate increases because the value of its assets will fall less than its liabilities. 39) A major shortcoming of the maturity model is its A) focus on market values. B) neglect of reinvestment income on interim cash flows. C) computational simplicity. D) concern with mismatches on the balance sheet. E) oversimplified assumptions