Question: Suppose that a bank has $10 billion of 1-year loan and $15 billion of 5-year loan. These are financed by $15 billion of 1-year deposit

Suppose that a bank has $10 billion of 1-year loan and $15 billion of 5-year loan. These are financed by $15 billion of 1-year deposit and $7 billion of 5-year deposit. The bank has equity totaling $2 billion and its ROE (return on equity) before tax is currently 10%.

(a)What is the bank's asset-liability mismatch?(1 mark)

(b)What is the profit before tax?(1 mark)

(c)Let X% be the rise in interest rates next year so that the bank's ROE will be reduced to half. What is the value of X? (2 marks)

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