Question: 5. (a) Distinguish between income gap and duration gap analysis in managing interest rate risk. Critically examine the limitations of each. (10 marks) (b) Consider

5. (a) Distinguish between income gap and duration gap analysis in

5. (a) Distinguish between income gap and duration gap analysis in managing interest rate risk. Critically examine the limitations of each. (10 marks) (b) Consider the following balance sheet of Unibank: Estimate the impact of an increase in interest rates from 3% to 4% on the equity of Unibank. (7 marks) (c) Explain why the answer calculated in part (b) is an estimate. (4 marks) FN1024 Principles of Banking and Finance Page 3 of 5 (d) Explain what a duration gap of zero implies for a bank and discuss why banks generally do not operate with duration gaps of zero. (4 marks)

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