Note: 1] current market interest rate is 10% 2) planning period is l year= 3] checking deposit pays no interest rates and 4) saving deposit's maturity is less than 1 year. To prepare your presentation for the bank ofcers. you anticipate and answer the I following questions: 1. 'What is the total for interest-rate-sensitive assets @ a. Your firm? b. Your competition? 2. 'What is the total for interest-rate-sensitive liabilities Q a. Your f'n'm? b. Your competition? 3. Compare the impact of estimated net interest income of your bank and your competition if interest rates nNIIi = {ISGAPi} ARi = (ISA; - ISL 3 AR; a. DecLine by 3% b. Increase by 3% Your employer has asked you to examine the interest-rate risk of your bank relative to your direct competition. Management is concerned that interest rates will fall by the end of the year and wants to see what would happen to the relative profitability of the firm if the decline actually occurs. Interest-rate risk depends on each bank's relative position of interest-sensitive assets and liabilities. You begin the analysis by collecting the information and estimates. Bank Balance Sheet Your Firm Competition Amount Duration Amount Duration ($millions) (years) ($millions) (years) Assets Reserves and cash items 0.0 0.0 Securities Less than 1 year 0.6 0.3 1-2 years WA 1.6 1.2 Greater than 2 years 5.0 4.0 Residential mortgages Variable-rate 0.4 21 0.9 Fixed-rate (30 years) 15 5.5 17 4.4 Commercial loans Less than 1 year 0.9 30 0.6 1-2 years 1.8 22 1.4 Greater than 2 years 6.0 30 5.4 Physical capital 10 0.0 25 0.0 Liabilities Checkable deposits 10 1.0 14 1.0 Money market deposit accounts 0.6 9 0.5 Savings deposits 12 1.0 16 1.0 CDS Variable-rate 0.4 12 0.6 Less than 1 year 0.3 14 0.5 1-2 years 10 1.8 Greater than 2 years 10 2.2 Fed funds 0.0 14 0.0 Borrowings Less than 1 year 0.4 18 0.7 1-2 years 1.2 12 1.8 Greater than 2 years 31 3.8Assume that initial interest rate was 10%. 107 What would your rm need to (120 a. To eliminate the income gap using adjustments to rate-sensitive assets? b, To immunize the market value of net worth from interest-rate risk using duration? 9. \"What is the repricing gap of a. Your rm? b. Your competition? Using the Macalay concept of duration. calculate the weighted duration of each asset and liability for both your rm and your competition. \"What is the average duration Q a. Assets for your rm? b. Assets for your competition? c. Liabilities for your firm? d. Liabilities for your competition? \"What is the duration gap Q a. Your rm? b. Your competition? Using the net worth formula if interest rates decline by 3%. what will be the expected change in the market value of net worth for a. Your rm? b. Your competition? Assume that initial interest rate was 10%. Using the net worth formula. if interest rates rise by 3%. what will be the expected change in the market value of net worth for a. Your rm? b. Your competition