1. Given the estimates of duration in Problem 21, how should the bank alter the duration of its liabilities to immunize its net worth from interest-rate risk? For Problems 24–29, assume that the Friendly Finance Company initially has the balance sheet shown on page 581 and that interest rates are initially at 8%.
2. If the manager of the Friendly Finance Company decides to sell off $10 million of the company’s consumer loans, half maturing within one year and half maturing in greater than two years, and uses the resulting funds to buy $10 million of Treasury bills, what is the income gap for the company? What will happen to profits next year if interest rates fall by 5 percentage points? How could the Friendly Finance Company alter its balance sheet to immunize its income from this change in interest rates?
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