If First National Bank has a gap equal to a negative $30 million,then a 5 percentage point increase in interest rates will cause profits to

Question

Quizplus · Accepted Answer

A negative gap means that the bank's liabilities (deposits) with shorter maturities exceed its assets (loans) with longer maturities. When interest rates increase, the cost of funding (liabilities) increases more than the revenue earned (assets), leading to a decline in profits. The magnitude of the decline can be estimated using the gap multiplied by the change in interest rates and the duration of assets or liabilities. Assuming a duration of 1, a 5 percentage point increase in interest rates leads to a decline in profits of $1.5 million (30 million x 0.05 x 1). Therefore, the correct answer is D.

If First National Bank Has a Gap Equal to a Negative