Assume that the Friendly Finance Company initially has the balance sheet shown on page 607 and that interest rates are initially at 8%.

If the manager of the Friendly Finance Company decides to sell off $10 million of the company's consumer loans, half maturing within one year and half maturing in greater than two years, and uses the resulting funds to buy $10 million of Treasury bills, what is the income gap for the company? What will happen to profits next year if interest rates fall by 5 percentage points? How could the Friendly Finance Company alter its balance sheet to immunize its income from this change in interest rates?

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Cash and deposits Securities Assets Less than 1 year 1 to 2 years Greater than 2 years Consumer loans Less than 1 year 1 to 2 years Greater than 2 years Physical capital Total Friendly Finance Company $3 million $5 million $1 million $1 million $50 million $20 million $15 million $5 million $100 million Liabilities Commercial paper Bank loans Less than 1 year 1 to 2 years Greater than 2 years Long-term bonds and other long-term debt Capital Total $40 million $3 million $2 million $5 million $40 million $10 million $100 million