Scandia issues one-year CDs with a face value of S1 million at 5.75% and uses the proceeds to make one-year loans at 6% interest. The loan principal will be repaid in two installments, with $500,000 to be repaid after six months and the remaining half outstanding at the end of the year.

(1) What is the maturity gap of this financial institution? Under this term gap, what is the interest rate risk cushion measured by the maturity model?

(2) What is the estimated year-end net interest income?

(3) The loan has been extended. What is the effect on net interest rate income when the interest rate increases by 2%? If the interest rate drops by 2% after the loan is issued, what will be the effect on the net interest income at the end of the year?

(4) What does this say about the ability of maturity models to protect financial institutions from interest rate risk?