Question

Assume a bank has the following balance sheet (in 000s).

Assets	Potential rate change	Amount		Liabilities	Potential rate change	Amount
Cash	n.a	$200		90-day CDs	0.25%	$200
6-month T-bonds	1.00%	$400		360-day CDs	0.75%	$400
2-year commercial loans	2.00%	$300		Time Deposits 2-year	2.00%	$800
5-year fixed rate loans	2.50%	$600		Stockholder’s equity	n.a	$100
Total		$1,500		Total		$1,500

1. Determine the 1-year cumulative GAP. What is the impact on net interest income (NII), if interest rates are expected to increase by 1% across the board (all interest rates)?
2. What is the impact on net interest income (NII), if interest rates are expected to increase as specified in the Potential rate change for the 1-year CGAPs?

Answer 1

First, let's convert Given Interest-Bearing Assets and Liabilities into 1 Year Period

Interest Bearing Assets :

1. 6 Months T-bonds @1% = $200

Therefore for 12 months = $200 *2

= $400

2. 2-Years Commercial Loans @2% = $300

Therefore for 1-Year = $300 /2

= $150

3. 5-Year Fixed Rate Loans @2.5% = $600

Therefore for 1-Year = $600 /5

= $120

Interest Bearing Liabilities :

4. 90- day CD's @0.25% = $200

Threfore for 360 days = $200*360 /90

= $800

5. 360-day CD's @0.75 % = $400

6. 2-Year Time Deposits @2% = $800

Therefore for 1-year = $800 /2

= $400

Calculation of 1-Year Cumulative GAP:

Interest Rate GAP = Interest Rate Assets - Interest Rate Liabilities

= $400 + $150 + $120 - $800 - $400 - $400

= - $930

Impact on Net Interest Income (NII), if interest rates are expected to increase by 1% across the board (i.e all interest rates) :

Net Impact will be = GAP * Change in Interest Rates

= - $930 * 1%

= - $9.3

Therefore increase of all interest rates @1% will reduce the NII by $9.3

(b) Impact on Net Interest Income (NII), if Interest rates expected to Increase as specified in the Potential Rate Change for the 1-Year CGAP's :

= Respective Interest-Bearing Assets/ Liabilities multiplied by a respective potential interest rate change as given

= $400 * 2% + $150 * 1% + $120 * 0.5% - $800*1% - $400*0.75% - $400*1%

= $8 + $1.5 + $0.6 - $8 -$3 - $4

= - $4.9

Therefore increase of Interest Rates as specified in the Potential Rate Change for the 1-Year CGAP's will reduce the NII by $4.9