DI has assets of $13 million consisting of $3 million in cash and $10 million in loans. It has core deposits of $5 million. It also has $4 million in subordinated debt and $4 million in equity. Increases in interest rates are expected to result in a net drain of $2 million in core deposits over the year. a-1. The average cost of deposits is 4 percent and the average yield on loans is 7 percent. The DI decides to reduce its loan portfolio to offset this expected decline in deposits. What is the cost to the firm from this strategy after the drain

Variable rate cd’s = $90 treasury bills = $150 discount loans = $20 treasury notes = $100 fixed rate cds = $160 money market deposit accts. = $140 savings deposits = $90 fed funds borrowing = $40 variable rate mortgage loans $140 demand deposits = $40 primary reserves = $50 fixed rate loans = $210 fed funds lending = $50 equity capital = $120 a. develop a balance sheet from the above data. be sure to divide your balance sheet into rate-sensitive assets and liabilities as we did in class and in the examples. b. perform a standard gap analysis and a duration analysis using the above data if you have a 1.15% decrease in interest rates and an average duration of assets of 5.4 years and an average duration of liabilities of 3.8 years. c. indicate if this bank will remain solvent after the valuation changes. if so, indicate the new level of equity capital after the valuation changes. if not, indicate the amount of the shortage in equity capital.