"question 1: a bank with a two-year investment horizon has issued a one-year certificate of deposit for $50 million at an interest rate of 2 percent. with the proceeds, the bank has purchased a two-year treasury note that pays 4 percent interest. what risk does the bank face in entering into these transactions? what would happen if all interest rates were to rise by 1 percent? question 2: why do you think that u. s. banks are prohibited from holding equity as part of their own portfolios?"

Explanation: Bank is faced with the risk of monetary value of Treasury note may fall. After one year, the bank must make sure that the funds are available at hand. funds made available by banks are being sold at the end of the first year.With the fall in value, there might be a capital loss which is a risk that may occur.

The bank will need to absorb a capital loss peradventure if the value of asset drops . Then capital loss could be greater than 2%, given that the value of asset fall further below.

Meaning, the case will again be the same, if the interest rate increased by 1%..

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answer; planning;