4. Consider the following accounts of the Second National Bank. Assets $mn Liabilities $mn ---------------------------------------------------------------------------------------------------------------- Rate-sensitive assets 50 Rate-sensitive Deposits 30 (Duration 5 years) (Duration 3 years) Fixed Rate Assets 100 Fixed rate Deposits 90 (Duration 5 years) (Duration 3 years) Share Capital 30 ---------------------------------------------------------------------------------------------------------------- a. If the interest rate rises by 5%, what is the impact on the Bank

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codiepienagoya codiepienagoya · Answer 1 · 2020-10-14T08:06:41+02:00

Answer:

Follows are the solution to this question:

Explanation:

Sensitive rate of assets RA = $50 mn

liabilities or deposits sensitive rate RL = $30 mn

Formula for difference:

[tex]\bold{GAP=RA - RL}[/tex]

[tex]= \$ \ 50 - \$ \ 30 \\\\ = \$ \ 20 \ mn[/tex]

It helps Difference analysis to detect changes throughout the revenue or net earnings of a banks interest rate due to change

The net interest rate of change = GAP [tex]\times[/tex] interest rate of change

As the rate rises, its interest rate changes = +5%

[tex]\text{Net interest rate change} = \$ 20 \ mn \times 5 \%[/tex]

[tex]= \$ 20 \ mn \times \frac{5}{100}\\\\= \frac{5}{5}\\\\= \$ 1 \ millon[/tex]

Due to the 5 percent change in interest rates, GAP research shows that bank net interest revenue rises by $1 millon.