A bank with a two-year horizon has issued (liability) a one-year certificate of deposit for $25 million at an interest rate of 3 percent.

With the proceeds, the bank has purchased (asset) a two-year Treasury coupon note that pays 5 percent interest.

A.) What risk does the bank face in entering into these transactions?

B.) Please Calculate the impact on net interest income (net profit) if all interest rates were to fall by 1 percent? (note: the bond will be held to maturity no impact on bond price). What is the impact on the income statement?

Answer rating: 100% (QA)

A The bank faces interest rate risk in entering into these transactions Interest rate risk refers to ... View the full answer