Question

1. The following problem has you examine the impact of interest rate changes on bank profits using basic gap analysis.

   Assume that the amount of variable- and fixed-rate assets and liabilities is fixed over the next year. In other words, no assets or liabilities will mature during this period. For each part, be sure to give a numerical answer.

   1. Suppose a bank has $70M in variable-rate assets and $120M in variable-rate liabilities. What is the impact on the bank’s profits of a 1.5% increase in interest rates?

   2. If the bank has $200M in assets, what is the impact on the return on assets (ROA)?

   3. If the bank has $200M in assets and an capital of $15M, what is the impact on the

      return on equity (ROE)?

Answer 1