Question

4. Consider the following accounts of the Second National Bank. Assets $mn Liabilities $mn ---------------------------------------------------------------------------------------------------------------- Rate-sensitive assets 50 Rate-sensitive Deposits 30 (Duration 5 years) (Duration 3 years) Fixed Rate Assets 100 Fixed rate Deposits 90 (Duration 5 years) (Duration 3 years) Share Capital 30 ---------------------------------------------------------------------------------------------------------------- a. If the interest rate rises by 5%, what is the impact on the Bank

Answer 1

Follows are the solution to this question:

Step-by-step explanation:

Sensitive rate of assets RA = $50 mn

liabilities or deposits sensitive rate RL = $30 mn

Formula for difference:

`\bold{GAP=RA - RL}`

`= \$ \ 50 - \$ \ 30 \\\\ = \$ \ 20 \ mn`

It helps Difference analysis to detect changes throughout the revenue or net earnings of a banks interest rate due to change

The net interest rate of change = GAP
`*` interest rate of change

As the rate rises, its interest rate changes = +5%

`\text{Net interest rate change} = \$ 20 \ mn * 5 \%`

`= \$ 20 \ mn * (5)/(100)\\\\= (5)/(5)\\\\= \$ 1 \ millon`

Due to the 5 percent change in interest rates, GAP research shows that bank net interest revenue rises by $1 millon.