Question

Bank 7 Assets Yield Rate Sensative Fixed Rate Non Earning abilities Rate 19 500 250 150 115 220 100 Total Equity 1000 1000 32. Calculate the Gap 33. Calculate Net Interest Income 34. Calculate Net Interest Margin 35. Recalculate Net Interest Income and Net Interest margin when interest rates increase by 1% 36. Calculate a the Duration and Modified Duration of the following Bond Current Price $1,026.24 Face Value 1000 Coupon Rate 8% Maturity 3 years Annual Bond 37. If Interest rates increase by 1 %, what will be the percentage change in the Bond's price?

Answer 1

32) Calculate the GAP -

GAP = Assets with Interest Rate - Liabilities with Interest Rate

GAP = (600+250) - (600+220) = 30

33) Net Interest Income = Interest received - Interest Paid

Net Interest Income = (600*.08 + 250*.11) - (600*.04+220*.06)

Net Interest Income = 38.3

34) Net Interest Margin = (Interest received - Interest Paid) / Interest Earning Assets

= 38.3/ 850 = 4.51%

34) If Interest Rate Increases by 1% - Assuming bank will pass on these benefits to customers immediately

Net Interest Income = (600*.09 + 250*.11) - (600*.05+220*.06) = 38.30

It won't impact anything on Net Interest Income and Net Interest Margin as bank has equal rate sensitive asset and liabilities so impact of that is getting nullified.

Hope it helps