Question

For Question 2-5 Assets Yleld Liability Cost Rate sensitive 1000 5% 800 2% Flx rate 2000 7% 1800 6% Not earning 1000 2600 Shareholder Equity 1400 Total 2. Find out Net Interest Income, Net Interest Margin, and GAP? 4000 4000 If yield curve moves parallel and interest rate increase by 2 percent, what happens to net interest income, net interest margins and GAP (decrease or increase by how much for each)? Why?

Answer 1

Net Interest Income = Total Interest Income from Assets - Total Interest Expenses from Liabilities

= (1000*0.05 + 2000 * 0.07) - (800 * 0.02 + 1800*0.06) = 66

Net Interest Margin = Net Interest Income / Interest Bearing Assets

= 66 / 3000 = 2.20%

GAP = Rate Sensitive Assets - Rate Sensitive Liabilities = $1000- $800 = $200

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Interest Rate Increased by 2%

Net Interest Income = (1000*0.07 + 2000 * 0.09) - (800 * 0.04 + 1800*0.08) = 74

Net Interest Margin = 74 / 3000 = 2.47%

GAP = $1000- $800 = $200

As there is change in interest rate not the composition of interest bearing assets and liabilities or interest sensitive assets and liabilities so Net Interest Income will change due to change in rate and Net Interest Margin will change as numerator is Net Interest Income. No change in GAP.

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If Interest Rate Increase by 1% and spread decrease by 1%, it means decrease in gap in interest rate of assets and liabilities

Original Interest Rates and Spread

Assets	Yield	Liabilities	Yield	Spread
Rate Sensitive	5%	Rate Sensitive	2%	3%
Fix Rate	7%	Fix Rate	6%	1%
Non Earning		Equity

Updated Interest Rates and Spread

Assets	Yield	Liabilities	Yield	Spread
Rate Sensitive	6%	Rate Sensitive	4%	2%
Fix Rate	8%	Fix Rate	8%	0%
Non Earning		Equity

Net Interest Income = (1000*0.06 + 2000*0.08) - (800*0.04 + 1800*0.08) = 44

Net Interest Margin = 44 / 3000 = 1.47%

GAP = $1000- $800 = $200

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Updated Interest Rates and Spread

Assets	Yield	Liabilities	Yield	Spread
Rate Sensitive	8%	Rate Sensitive	6%	2%
Fix Rate	10%	Fix Rate	10%	0%
Non Earning		Equity

Net Interest Income = (1000*0.08 + 2000*0.10) - (800*0.06 + 1800*0.10) = 52

Net Interest Margin = 52/ 3000 = 1.73%

GAP = $1000- $800 = $200