a) Discuss the impact of interest rate risk on banks. b) Consider the following balance...
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a) Discuss the impact of interest rate risk on banks. b) Consider the following balance sheet of Sitibank: () Duration Assets () Duration Variable-rate mortgages 1300 8.1 Fixed-rate mortgages 1200 6.1 Commercial loans 3000 4.2 Liabilities Money market deposits 1000 0.7 3000 2.3 Savings deposits Variable-rate CD 1. (>1 year) Equity Total Physical capital Total 500 6000 1000 1.2 1000 6000 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 Siti Bank. c) Calculate the impact of a decrease in interest rates from 3% to 2% on the equity of SitiBank. d) Explain why banks have positive duration gaps
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