Question

c h guestion s 2740 Show Bank 5 abilities Rate Rate Sensative Fixed Rate Non Earning 320 100 Equity 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

Hi,

Interest rate gap = interest bearing assets - interest bearing liabilities

= 850-820

=30

NII =

assets * yield liabilities * cost

= (600*0.08+250*0.11)-(500*0.04+320*0.06)

=36.3

NIM = NII/interest bearing assets

= 36.3/850

=4.27%

NII when interest rate falls by 1% ( Please note that no change will take place in fixed rate interest bearing assets and liabilities)

=(600*0.07+250*0.11)-(500*0.03+320*0.06)

= 35.3

NIM = 35.3/850 = 4.15%

With the gap spread being positive , more assets than liabilities get repriced. Hence when interest rate falls,

Relationship between the GAP and Net Interest Income - If Gap is positive, it means we have more assets which are giving us interest income. If there is decrease in interest rate that means we are earning less now, though there decrease in outflows too but liabilities are less than assets so in total there is fall in NII. NIM is directly connected with Net Interest Income and Interest earning assets so that will also fall.