A commercial bank has $25 billion of one-year loans and $75 billion of five-year loans. These are financed by $40 billion of one-year deposits and $55 billion of five-year deposits. The bank has equity totaling $5 billion and its return on equity is currently 6% (after tax). Estimate the change in interest rates next year would lead to the bank’s return on equity being reduced to zero. Assume that the bank is subject to a tax rate of 25%.
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