Your employer has asked you to examine the interest-rate risk of your bank relative to your direct competition. Management is concerned that interest rates will fall by the end of the year and wants to see what would happen to the relative profitability of the firm if the decline actually occurs.

Interest-rate risk depends on each bank's relative position of interest-sensitive assets and liabilities. You begin the analysis by collecting the information and estimates.

1. Using the net worth formula if interest rates decline by 3%, what will be the expected change in the market value of net worth for:

a) Your firm?

b) Your competition?

2. Using the net worth formula, if interest rates rise by 3%, what will be the expected change in the market value of net worth for:

a) Your firm?

b) Your competition?

please show clear calculation process (step by step)

Bank Balance Sheet Competition Your Firm Duration ears Duration Amount Amount Smillions rs Assets Reserves and cash items 4 0.0 0.0 0.6 1.6 5.0 0.3 1.2 4.0 Less than 1 year 1-2 years 9 Greater than 2 years Residential mortgages 0.4 5.5 0.9 4.4 Variable-rate 15 Fixed-rate (30 years) Commerical loans 0.6 1.4 5.4 0.0 30 0.9 1.8 6.0 0.0 13 31 Less than 1 year 1-2 years Greater than 2 years Physical capital 25 10 Liabilities Checkable deposits Money market deposit accounts Savings deposits CDs 14 9 16 1.0 0.5 1.0 1.0 0.6 10 12 6 0.4 0.3 1.1 2.9 0.0 0.6 0.5 1.8 2.2 0.0 Variable-rate Less than 1 year 14 10 10 14 19 1-2 years Greater than 2 years 15 10 12 39 Fed funds Borrowings Less than 1 year 1-2 years Greater than 2 years 0.4 1.2 2.9 18 12 31 0.7 1.8 3.8