A bank with a 2-year horizon has issued a 1-year certificate of deposit for $50 million at an interest rate of 2%. With the proceeds, the bank has purchased a 2-year Treasury note that pays 4% interest. What risk does the bank face in entering into these transactions?
The bank faces the risk that the short-term interest rate will _______ before the seconde year, _________ the amount of interest the bank has to pay on the CD, but leaving the interest income that the bank receives from the Treasury note unchanged. With an interest rate of 2% for the CD and 4% for the Treasury note, the bank's annual interest income is $______ and the bank's annual interest espenses are $______. The bank makes a profit of $_________.
If the interest rate rises 1%, the bank's profit in the second year falls to $________.