Problem:
Suppose that a bank has $10 billion of one-year loans and $30 billion of five-year loans. These are financed by $35 billion of one-year deposits and $5 billion of five-year deposits. The bank has equity totaling $2 billion and its return on equity i currently 12%.
Task:
Question: Estimate what change in interest rates next year would ead to the bank's return on equity being reduced to zero. Assume that the bank is subject to a tax rate of 30%.
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