Question

Problems 27-40 Show you rems 27-40 Show your work Each question is worth 3 points Bank 5 Rate Sensative Fixed Rate Non Earning Assets Yield 600 250 150 Liabilities Rate 500 8% 11% 0% 4% 6% 320 100 Total Equity 1000 80 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 terest 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 = total interest income from interest earning assets - total 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). Interest rates decrease by 1%

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

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

31). Gap represents the difference between the dollar value of interest sensitive assets and liabilities where as the net interest income measures the profit from interest which a bank earns. It is seen that for a positive gap, as interest rates fall, net interest income falls as well and so, does the margin.