. Consider the following asset and liability positions of the two banks: County
ID: 2780814 • Letter: #
Question
. Consider the following asset and liability positions of the two banks:
County Bank State Bank
Asset: 1-year commercial loan that Asset: 3-year commercial loan priced at
yields a fixed 6% [$5 million] LIBOR + 3% [$5 million]
Liability: 6-month CD [$5 million] Liability: 2-year CD [$5 million]
a. Calculate each bank’s 6-month GAP and 1-year GAP.
b. If interest rates fall, over the next 6 months, what will the expected impact be on each bank’s
net interest income? Explain how both interest income and interest expense will change.
c. If interest rates rise, in general, over the next 6 months, what will the expected impact be
on each bank’s net interest income? Explain how both interest income and interest expense
will change
Explanation / Answer
Soln : a)
For Central bank : Assest for 6 months maturity = 0 , Liability after 6 month = 5 million. So 6 month GAP = -$5 million
1 year asset maturity = 5 million and if they rollover 6 month liability CD , then the 1 year GAP = 5-5 = 0
For State Bank, 6 month GAP and 1 year GAP will be 0 as nothing is maturing at that time.
b) If interest rate goes down in next 6 month For Central bank:
the net interest income remain unchanged while the interest Liability will go down, hence, Net Interest income will rise.
For state Bank as the GAP is 0 for 6 months , no changes in net interest income or margin.
c) In case if interest goes up in next 6 months, For Central bank, the Net interest income will go down as interest rate of asset will not change and Liability interest will go up.
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