1. If the First National Bank sells $10 million of its securities with maturities greater than two years and replaces them with securities maturing in less than one year, what is the income gap for the bank? What will happen to profits next year if interest rates fall by 3 percentage points?
2. If the First National Bank decides to convert $5 million of its fixed-rate mortgages into variable-rate mortgages, what happens to its interest-rate risk? Explain with income gap and duration gap analyses.
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