Please answer for full 25 marks.

6. a) Discuss the impact of interest rate risk on banks. (8 marks) b) Consider the following balance sheet of Arrowbank: () Duration () Duration Liabilities Money market deposits 1200 7.5 Assets Variable-rate mortgages Fixed-rate mortgages Commercial loans 1000 0.7 2800 2.2 1200 6.0 3000 4.0 Savings deposits Variable-rate CD (>1 year) Equity Total Physical capital Total 400 5800 1000 1.1 1000 5800 Make the following assumptions on the runoff of cash flows: fixed-rate mortgages repaid during the year: 10 percent; proportion of savings deposits and variable-rate CD that are rate-sensitive: 20 per cent. Calculate the impact of an increase in interest rates from 3% to 4% on the net interest income of Arrowbank. (5 marks) c) Calculate the impact of a decrease in interest rates from 3% to 2% on the equity of Arrowbank. (7 marks) d) Explain why the calculation in part (c) only provides an estimate of the change in the value of equity