The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated at 2 years.
-What is the impact on net interest income in year two if interest rates increase by 50 basis points at the end of year one? Ignore runoffs.
A)+$0.210 million.
B)+$0.300 million.
C)-$0.300 million.
D)-$0.210 million.

Question

The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated at 2 years. 
-What is the impact on net interest income in year two if interest rates increase by 50 basis points at the end of year one? Ignore runoffs.
A)+$0.210 million. 
B)+$0.300 million. 
C)-$0.300 million. 
D)-$0.210 million.

Quizplus · Accepted Answer

Find 2- year GAP first. Reminder to ignore runoffs
 
 GAP(2-year) = RSA(2) - RSL(2)
 GAP(2-year) = (3-month T-bills + 2-year bonds) - (Demand deposits)
 GAP(2-year) = ($60 + $60) - $180 = -$60 million. Same as the 3-year gap found previously
 
 Change in NII next year if interest rates increase 50 basis points (+0.005)
 
 ∆NII = (2-year GAP) x ∆R
 ∆NII = -$60,000,000 x 0.005 = -$300,000 or -$0.300 million.

The Following Is the Balance Sheet of Boston Bank