Question

A financial institution has $100 million of fixed earning assets that mature in 2 years. The assets earn an average of 8%. These are funded by 6 month CD liabilities paying 3.5%. If in 6 months interest rates increase 100 basis points How does the NIM change?

Answer 1

Solution:-

NET INTEREST MARGIN(NIM)

Net interst margin is a measure of the diffrence between the interest income generated by the bank or other financial institution and the amount of interest paid out of the holders of saving accounts and certificate of deposits.Net Interest margin is a profitability metric that measures how much a bank earns in interest compired to the outgoing expenditure it pays to cusumers.A positive NIM indicates that a bank invests efficiently ,while a negative return implies investment efficiencies.Net interest Margin will be calculated in percentage.

NIM(Net Interest Margin)=(Interest Earned-Interest Paid)/Average Invesment Assets

Here,

Case 1.Interest Earned=$8 Million

Interest Paid =$1.75 Million

Net Interest Margin=($8-$1.75)/100*100=6.25%

Case 2. if Interst Increased by 100 base point

Interest Earned=$8 Million

Interest Paid =$2.25 Million(100*4.5%*1/2)Here, the Interest rate was increased by 100 base point ,so that the interest rate will change to 4.5 % from 3.5%

Net Interest Margin=($8-$2.25)100*100=5.75%

Net Inerest Marging Change=6.25%-5.75%=.5%

Net Inerest Marging Change will be .5%.