Question

If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to Question 4 options: A) decline by $1.5 million. B) increase by $15 million. C) decline by $15 million. D) increase by $1.5 million.

Answer 1

Answer: A. Decline by $1.5million

Step-by-step explanation:

First national bank has a negative gap of $30million.

Then, a 5% point increase in interest rate,

(5 ÷ 100) * $30,000,000 = $1,500,000

Therefore, a 5 percentage point increase in interest rate will attract $1.5 million decline in profit.

These means first national bank benefits from the 5 percentage point increase and decline in the negative Gap by $1.5 million dollars.

Answer 2

A

Step-by-step explanation:

Interest is an expense that decreases profits. If the interest rate is increased, this will cause a decrease in profits. If profits are equal to -$30 million then a 5% increase in the rate will be equal to 5% * $30 million = $1.5 million. It does not matter that the company is already realizing a negative gap, an increase in the interest rates will increase the gap