Question 2- Income Gap + Overall Duration Gap [17 marks] (a) Consider the following balance sheet of Banco Credit: Assets Duration (years) Variable rate mortgages 9.2 Fixed rate mortgages 5.2 Commercial loans 4.5 Physical capital Total (S) 250 1 70 790 300 1510 (S) 450 300 100 660 1510 0.8 2.7 1.1 Liabilities Duration (years) Money market deposits Savings deposits Variable rate CDs Equity Total Assumptions Fixed rate mortgages repaid in the coming year = 25% Savings deposits that become rate sensitive in the coming year = 20% All commercial loans are rate sensitive All money market deposits are rate sensitive Using income gap analysis, calculate the change in net interest income over the coming year if interest rates increase by 1% from 4% to 5% (4 marks) (b) What is the duration gap for Banco Credit? (4 marks) (c) What is the estimated change in the value of equity (in $s) for Banco Credit if interest rates increase by 1% from 4% to 5%? (4 marks) (d) Explain why a bank with a positive duration gap is estimated to see a fall in the value of its equity when interest rates increase