Duration gap for the bank is 1,715,000

1. If the First National Bank sells $10 million of its securities with maturities greater than two years and replaces them with securities maturing in less than one year, what is the income gap for the bank? What will happen to profits next year if interest rates fall by 3 percentage points?

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Assume that the First National Bank has the balance sheet shown below, the income gap is currently -$17.5 million, and that interest rates are initially at 10%. First National Bank Assets Duration Liabilities Reserves Securities 5,000,000 0.00 Checkable Deposits Money Market Deposits Duration 15,000,000 2.00 5,000,000 0.10 < 1 Year 1 to 2 Years >2 years 5,000,000 0.40 5,000,000 1.60 10,000,000 7.00 Savings Accounts 15,000,000 1.00 CDs Variables-rate 10,000,000 0.50 Residential Mortgages Variables-rate <1 Year 15,000,000 0.20 10,000,000 0.50 1 to 2 Years 5,000,000 1.20 Fixed-rate 10,000,000 6.00 Commercial Loans <1 Year 15,000,000 0.70 >2 years Interbank Loans Borrowings 5,000,000 2.70 5,000,000 0.00 1 to 2 Years 10,000,000 1.40 <1 Year 10,000,000 0.30 >2 years Buildings, etc. 25,000,000 4.00 5,000,000 0.00 1 to 2 Years 5,000,000 1.30 >2 years Bank Capital 5,000,000 3.10 5,000,000 Total $100,000,000 Total $100,000,000 Duration gap for the bank is 1,715,000 1. If the First National Bank sells $10 million of its securities with maturities greater than two years and replaces them with securities maturing in less than one year, what is the income gap for the bank? What will happen to profits next year if interest rates fall by 3 percentage points? Assume that the First National Bank has the balance sheet shown below, the income gap is currently -$17.5 million, and that interest rates are initially at 10%. First National Bank Assets Duration Liabilities Reserves Securities 5,000,000 0.00 Checkable Deposits Money Market Deposits Duration 15,000,000 2.00 5,000,000 0.10 < 1 Year 1 to 2 Years >2 years 5,000,000 0.40 5,000,000 1.60 10,000,000 7.00 Savings Accounts 15,000,000 1.00 CDs Variables-rate 10,000,000 0.50 Residential Mortgages Variables-rate <1 Year 15,000,000 0.20 10,000,000 0.50 1 to 2 Years 5,000,000 1.20 Fixed-rate 10,000,000 6.00 Commercial Loans <1 Year 15,000,000 0.70 >2 years Interbank Loans Borrowings 5,000,000 2.70 5,000,000 0.00 1 to 2 Years 10,000,000 1.40 <1 Year 10,000,000 0.30 >2 years Buildings, etc. 25,000,000 4.00 5,000,000 0.00 1 to 2 Years 5,000,000 1.30 >2 years Bank Capital 5,000,000 3.10 5,000,000 Total $100,000,000 Total $100,000,000 Duration gap for the bank is 1,715,000 1. If the First National Bank sells $10 million of its securities with maturities greater than two years and replaces them with securities maturing in less than one year, what is the income gap for the bank? What will happen to profits next year if interest rates fall by 3 percentage points?