Question

1. ) Boston Bank has the following interest rates and sensitivity position. What is the current net interest margin (NIM)? What is the 90-day interest sensitivity gap? If rates increase by 200 basis points in 365 days, does the NIM likely increase, decrease, or stay the same during that 365-day period?                                         

                                          0-90 days                  91-365 days                  1 year+

Earning Assets            $mm   rate(%)            $mm    rate(%)          $mm   rate(%)    weighted avg. rates(%)

          Loans                             170     6.70                  140    6.40                  90     6.00                       6.44

Investments                    50     3.30                    50    3.00                  40     2.90                       3.08

           Cost Liabilities

MMA/Savings                 20    1.80                   60    1.80                   30     1.80                       1.80

            3-5 Yr CDs                      250     2.60                   80   2.20                   70    2.10                       2.43

Answer 1

Net Interest Margin : Net interest margin is a ratio that measures how successful a firm is at investing its funds in comparison to its expenses on the same investments. A negative value denotes that the firm has not made an optimal investment decision because interest expenses exceed the amount of returns generated by investments.

	0-90 days	91-365 days	1year +
Earning Assets	$mm	rate(%)	Interest	$mm	rate(%)	Interest	$mm	rate(%)	Interest	weighted avg
Loans	170	6.70	11.39	140	6.40	8.96	90	6.00	5.4	6.44
Investments	50	3.30	1.65	50	3.00	1.5	40	2.90	1.16	3.08
Total Assets	220	10.00	13.04	190	9.40	10.46	130	8.90	6.56	9.52
Cost Liabilities
MMA/Savings	20	1.80	0.36	60	1.80	1.08	30	1.80	0.54	1.8
3-5 Yr CDs	250	2.60	6.5	80	2.20	1.76	70	2.10	1.47	2.43
Total Liabilities	270	4.40	6.86	140	4.00	2.84	100	3.90	2.01	4.23
NIM = [(Interest Received - Interest Paid) / Weighted Average Assets]	{(13.04)-6.86] / 220 } 0.64	{( 10.46 - 2.84) / 9.52] 0.80	{(6.56-2.01) / 9.52} 0.47
Interest Sensitvity Gap (Interest Sensitive Assets - Interest Sensitive Liabilities)	(220 - 250) -50	(190 - 80) 110	(130 - 70) 60

If the rate increase by 200 basis points in 365 days for both the asset rates and Liability rates,the effect will be as follows.

For 90 - 365 days Period

Change in Net Interest Income = {(Total Assets * 0.02) - (Total Liabilities*0.02)} / Average Assets

=(190 *0.02) - (140 *0.02)} / 9.52

= (3.8 - 2.8 ) / 9.52 = 0.10

So the new NIM will be 0.80 + 0.10 = 0.90

For 1 + Year

Change in Net Interest Income = {(Total Assets * 0.02) - (Total Liabilities*0.02)} / Average Assets

= {(130*0.02 ) - (100*0.02)} / 9.52 =

= (2.6 - 2) / 9.52 = 0.06

So the new NIM will be 0.47 + 0.06 = 0.53

Hence there will be increase in NIM when rate increases by 200 basis points in a 365 day period