Given the following balance sheet for, answer question:

Question: -What changes in portfolio composition would you recommend to management if you are expecting interest rates to rise? Assume that management is using a defensive strategy.

a) Lengthen the duration of liabilities and/or shorten the duration of assets

b) Lengthen the duration of assets and/ or shorten the duration of liabilities

c) Try to improve Net Interest Income

d) Try to improve Net worth

e) None of the above

- What is the bank's Duration GAP (in years)? If the market interest rate is expected to fall from 4% to 3%, what is the dollar change in Net Worth?

Assets Duration Amount 300 Floating rate loans Federal Funds Sold Fixed Rate Loans 1 year Duration Amount Liabilities & Equity 6 months 400 Variable Market Deposit Accounts 200 Federal Funds Purchased 4 years 900 Fixed Rate Liabilities Equity $1500 Total Liabilities & Equity 3 years 1 year 5 years 400 600 200 Total Assets $1500 Assets Duration Amount 300 Floating rate loans Federal Funds Sold Fixed Rate Loans 1 year Duration Amount Liabilities & Equity 6 months 400 Variable Market Deposit Accounts 200 Federal Funds Purchased 4 years 900 Fixed Rate Liabilities Equity $1500 Total Liabilities & Equity 3 years 1 year 5 years 400 600 200 Total Assets $1500