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NII = 3300 x 7.3% + 1400 x 8.7% - (2900 - 300) x 3.8% - (1650 + 300) x 6.1% = 144.95
NII is reduced compared with the amount initially expected because fix rate liabilities has
higher interest rates than the rate sensitive liabilities.
QUESTION 7
A.
Three - month
Six - month
One - year
Cumulative
County Bank
0 - 10 = - 10
0-0=0
10 - 0 = 10
- 10 + 0 + 10 = 0
City Bank
0-0=0
0 - 10 = - 10
0-0=0
0 + ( - 10) + 0 = - 10
B.
Compared with the county - level banks, city banks face greater interest rate risk. Therefore,
the higher interest rates will lead to more time that the city banks pay for it.
Based on part a,
In three - month period: higher interest risk on County Bank (negative GAP of County Bank
versus 0 GAP of City Bank);
In six - month period: higher interest risk on City Bank (0 GAP of County Bank versus negative
GAP of City Bank);
In one - year period: the same level (positive GAP of County Bank versus 0 GAP of City Bank).