Question

First National Bank: ​

- Assets Liabilities
Variable-rate $20 million $50 million
Fixed-rate $80 million $50 million
If interest rates rise by 5 percentage points from 10 to 15%, bank profits will:
Group of answer choices
1. decline by $1.5 million.
2. decline by $0.5 million.
3. decline by $2.5 million.
4. increase by $1.5 million.

Answer 1

1. decline by $1.5 million.

Step-by-step explanation:

The interest rates changing donot affect Fixed rate, but variable-rate Assets and Liabilities only.

The bank profit is earning on interest charged on assets (customers’ borrowings…) deduct interest charge on liabilities (customers’ deposit). Thus the bank profit for 5% rate increase = 5% * ($20 million - $50 million) = - $1.5 million