For every $100 in assets, a bank has $40 in interest-rate sensitive assets, and the other $60 in non-interest-rate sensitive assets. The same bank has $50 for every $100 in liabilities in interest-rate sensitive liabilities, the other $50 are in liabilities that are not interest-rate sensitive. If the interest rate on assets increases from 5 to 6 percent, and the interest rate on liabilities increases from 3 to 4 percent, the impact on the bank's profits per $100 of assets will be:

Question

Quizplus · Accepted Answer

Before the interest rate increase, the bank's net interest margin (NIM) was:
($40 * 0.05 + $60 * 0) - ($50 * 0.03 + $50 * 0) = $2
After the interest rate increase, the NIM becomes:
($40 * 0.06 + $60 * 0) - ($50 * 0.04 + $50 * 0) = $1.6
The change in NIM is -$0.4 per $100 of assets, or a decrease of $0.10 per $25 of assets (since $100 is divided into four quarters of $25 each). Therefore, the answer is B, a decrease of $0.10.

For Every $100 in Assets, a Bank Has $40 in Interest-Rate