If an organisation has a repricing gap equal to a positive $20 million,a 500 basis point drop in interest rates will cause profits to:
A) rise by $1.0 million.
B) rise by $10 million.
C) fall by $1.0 million.
D) fall by $10 million.

Question

Quizplus · Accepted Answer

A positive repricing gap indicates that the organization has more rate-sensitive assets than liabilities. A drop in interest rates will reduce the interest income more than the interest expense, causing profits to fall. A 500 basis point (or 5%) drop on a $20 million gap results in a $1.0 million decrease in profits.

If an Organisation Has a Repricing Gap Equal to a Positive