An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate CD.Use the repricing model to determine (a) the FI's repricing (or funding) gap using a 1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in interest rates on the FI's annual net interest income?
A)$0; $0.
B)-$200,000; +$2,000.
C)-$200,000; -$2,000.
D)+$50,000; -$500.
E)-$200,000; -$1,000.

Question

Quizplus · Accepted Answer

(a) To calculate the FI's repricing gap using a 1-year maturity bucket, we need to subtract the amount of 1-year fixed-rate CDs from the amount of 1-year fixed-rate loans. In this case, the FI has no 1-year fixed-rate loans, but they have a $200,000 1-year fixed-rate CD. Therefore, the repricing gap is -$200,000.

(b) A 100 basis point decrease in interest rates means that the FI's assets (2-year fixed-rate loan) will continue to earn the same interest rate, but the cost of their liabilities (1-year fixed-rate CD) will decrease. Using the repricing gap from part (a), we can calculate the impact on the FI's annual net interest income:

- Impact on earning assets: $250,000 x 2% x 100 bp = -$5,000 (because a decrease in rates reduces interest income)
- Impact on interest-bearing liabilities: $200,000 x 1.5% x 100 bp = +$3,000 (because a decrease in rates reduces interest expense)
- Net impact: -$5,000 + $3,000 = -$2,000

Therefore, the correct answer is B: -$200,000; +$2,000.

An FI Finances a $250,000 2-Year Fixed-Rate Loan with a $200,000