1. A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank's change in net worth?
A. Net worth will decrease by $31.81 million.
B. Net worth will increase by $31.81 million.
C. Net worth will increase by $27.27 million.
D. Net worth will decrease by $27.27 million.
E. Net worth will not change at all.
2. A bank with a negative duration gap can reduce its interest rate risk by:
A. increasing duration of its assets
B. decreasing duration of its liabilities
C. selling interest rate futures
D. All of the above
E. Only (A) and (B)