Question

Bank 5 Rate Sensative Fixed Rate Non Earning Assets Yield 600 8% 250 1196 150 096 Liabilities Rate 500 320 100 6% Equity 80 1000 Total 1000 27. Calculate the Gap 28. Calculate Net Interest Income 29. Calculate Net Interest Margin 30. Recalculate Net Interest Income and Net Interest margin when interest rates decrease by 1 31. Discuss the relationship between the Gap and the change in net interest income when interest rates decreased. Why did Net Interest Margin increase or decrease?

Answer 1

27). Gap = rate sensitive assets - rate sensitive liabilities = 600 - 500 = 100

28). Net interest income = interest income from interest earning assets - interest expense from interest earning liabilities

= (600*8%)+(250*11%) - (500*4%) - (320*6%) = 36.30

29). Net interest margin = net interest income/total interest earning assets = 36.30/(600+250) = 4.27%

30). If interest rates decrease by 1% then

Net interest income = (600*7%) + (250*10%) - (500*3%) -(320*5%) = 36

Net interest margin = 36/(600+250) = 4.24%

31). Changes in net interest income can be measured by the gap which is a difference between the dollar value of assets which reprice and dollar value of liabilities which reprice. For a positive gap, as interest rates decrease, net interest income and margin decrease, as well.