A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pre-tax net interest income will be __________.

Question

Quizplus · Accepted Answer

The bank's interest income remains the same because the asset rate is fixed, but the interest expense increases by 50 basis points. The new spread is 100 basis points (150 - 50), so the net interest income is 1% of $30 million, which is $300,000.

A Bank Has an Interest Rate Spread of 150 Basis