For every $100 in assets, a bank has $30 in interest-rate sensitive assets, and the other $70 in non-interest-rate sensitive assets. The same bank has $60 for every $100 in liabilities in interest-rate sensitive liabilities, the other $40 are in liabilities that are not interest-rate sensitive. If the interest rate on assets decreases from 6 to 5 percent, and the interest rate on liabilities decreases from 4 to 3 percent, the impact on the bank's profits per $100 of assets will be:

Question

Quizplus · Accepted Answer

The bank earns less on its interest-rate sensitive assets (decrease from 6% to 5% on $30, which is a $0.30 decrease) and saves less on its interest-rate sensitive liabilities (decrease from 4% to 3% on $60, which is a $0.60 decrease). The net effect is a reduction of $0.30 in profits per $100 of assets.

For Every $100 in Assets, a Bank Has $30 in Interest-Rate