4. (6 points) Consider the following balance sheet for a bank (in millions) sset

Question

4. (6 points) Consider the following balance sheet for a bank (in millions) ssets. Floating-rate mortgages (6-mon adj.) S50 30-year fixed-rate loans Demand deposits (0%) $70 $20 $10 50 One year CDs (196) Equity Total Assets $100 Total Liabilities &Equity; $100 The one year RSL is Hint: demand deposits pay 0% interest rate, thus not affected by interest rate risk. Workout: The one year cumulative repricing gap (i.e,,RSA-RSL) is Workout The market interest rates are forecasted to increase by 100 basis points. The dollar change in the net interest income of the bank will be Workout:

Explanation / Answer

1.

One year RSL (Rate Sensitive Liability) is   $20million

This is the liability which is afected by interest changes.

2.

The one year cumulative repricing gap (RSA - RSL) is $30million

Rate sensitive asset = $50m and Rate sensitive liability = $20m

3. The dollar change in the net interest income of the bank will be $0.30million.

The market rates are forecasted to increase by 100 basis points.

100 basis poits means 1%.

If the interest rates increased by 1% ,

Interest income will go up by $0.50million . (1% of $50million of assets)

Interest expenditure will also go up by $0.20million (1% of 20million of liabilities)

Hence the net interest income will go up by $0.30million

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