Consider a bank with the following balance sheet:
|
Assets ($millions)
|
Liabilities ($millions)
|
|
Reserves
|
$35
|
Zero-interest checking
|
$50
|
|
Variable-rate loans
|
$170
|
3-month CDs
|
$100
|
|
Fixed-rate loans
|
$75
|
10-year CDs
|
$175
|
|
3-month Treasury
|
$50
|
Bank Capital
|
$____
|
|
10-year Treasury bonds
|
$25
|
|
|
a) What is the bank capital?
b) Find the bank's (basic) gap.
c) Suppose spot interest rates fell by 2 percentage points. What would happen to the bank's profits? (Assume that interest rates on variable-rate assets and liabilities change instantly.)
d) What actions could you take to reduce the bank's interest-rate risk?