Consider the following asset and liability structures:
County Bank
Asset: $ 10 million in a one- year, fixed- rate commercial loan
Liability: $ 10 million in a three- month CD
City Bank
Asset: $ 10 million in a three- year, fixed- rate commercial loan
Liability: $ 10 million in a six- month CD
a. Is FSB positioned to profit or lose if interest rates rise over the next 90 days? Include in your discussion an analysis of the most likely rate environment.
b. Suppose that management has misstated the rate sensitivity of the bank’s money market deposit accounts because the bank has not changed the rate it pays on these liabilities for six months and doesn’t plan to change them in the near future. Will the bank profit if rates rise over the next 90 days?