Refer to the following table:
$$\begin{array} { | l | l | c | }
\hline { \text { Premier National Bank } } \
\hline & { \text { Assets } } & \text { Liabilities } \
\hline \text { Interest-sensitive } & \$ 60 \text { million } & \$ 90 \text { million } \
\hline \text { Fixed-rate } & \$ 70 \text { million } & \$ 40 \text { million } \
\hline
\end{array}$$
If interest rates rise by 500 basis points,bank profits (measured using repricing gap analysis)will:
A) fall by $0.5 million
B) fall by $1.5 million
C) fall by $3 million
D) increase by $1.5 million

Question

Refer to the following table:
$$\begin{array} { | l | l | c | } 
\hline { \text { Premier National Bank } } \
\hline & { \text { Assets } } & \text { Liabilities } \
\hline \text { Interest-sensitive } & \$ 60 \text { million } & \$ 90 \text { million } \
\hline \text { Fixed-rate } & \$ 70 \text { million } & \$ 40 \text { million } \
\hline
\end{array}$$
If interest rates rise by 500 basis points,bank profits (measured using repricing gap analysis)will:
A) fall by $0.5 million
B) fall by $1.5 million
C) fall by $3 million
D) increase by $1.5 million

Quizplus · Accepted Answer

The repricing gap is calculated as the difference between interest-sensitive assets and interest-sensitive liabilities. Here, it's $60 million - $90 million = -$30 million. A 500 basis point increase in interest rates (or 5%) applied to the gap results in a change in net interest income of -$30 million * 5% = -$1.5 million, indicating bank profits will fall by $1.5 million.

Refer to the Following Table If Interest Rates Rise by 500 Basis Points,bank Profits (Measured