A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative GAP of $10 million.Interest rates are expected to increase by 2%.If the bank does not want net interest income to fall by more than 25% during the next year, how large can the cumulative GAP be to achieve the allowable change in net interest income.
A)$2 million
B)$12 million
C)$15 million
D)$50 million
E)$62.5 million

Question

Quizplus · Accepted Answer

The allowable change in net interest income is 25% of $5 million, or $1.25 million. The change in net interest income due to the change in interest rates is $10 million * 2% = $200,000. The change in net interest income due to the change in the cumulative GAP is $1.25 million - $200,000 = $1 million. The cumulative GAP can be $1 million / 2% = $50 million.

A Bank Has $100 Million in Earning Assets, a Net