Question

The balance sheet for Bank A is as follows:

*Assets/Liabilities and Asset/Liability Rates Included*

Assets

Floating Rate: $700 @ 7%

Fixed Rate: $350 @ 10%

Non-Earning: $150

Liabilities

Floating Rate: $600 @ 5%

Fixed Rate: $420 @ 6%

Equity

$180

A) What is the repricing gap?

B) Calculate the net interest income.

C) Calculate the net interest margin.

D) If rates go up by 50 basis points, was the bank hedged accurately in anticipation of the rate change? Why or why not?

Answer 1

Rate Sensitive Assets RSA = Floating Rate Assets = $ 700

Rate Sensitive Liabilities RSL = Floating Rate Liabilities = $ 600

Ans a:

Repricing gap = RSA - RSL = 700 - 600 = $ 100

Ans b:

Interest Income in Assets = Floating Rate Asset * Rate + Fixed Rate Asset * Rate

= 700*6% + 350 * 10% = 42 + 35 = $ 77

Interest Expense in Liabilities = Floating Rate Liabilities* Rate + Fixed Rate Liabilities* Rate

= 600 * 5% + 420 * 6% = 30 + 25.20 = $ 55.20

Net Interest Income NII =  Interest Income in Assets -  Interest Expense in Liabilities

= 77 - 55.20 = 21.80

Ans :  net interest income. = $ 21.80

Ans c:

net interest margin =  net interest income / Interest producing Asset

=  21.80 / (700 + 350)

= 2.076%

Ans d:

If the rate goes up up by 50 Basis point

Increase in Earning = RSA * Increase Int. = 700 * 0.50% = 3.50

Increase in Expense= RSlL* Increase Int. = 600 * 0.50% = 3.00

Net Earnig Increase = Increase in Earning - Increase in Expense = 3.50 - 3.00 = 0.50

As Repricing gap is Positive bank will gain profit from increased interest rate. Hence  bank hedged accurately in anticipation of the rate change ( Rate will Increase)