Question

Lizard bank has the gap of -28 millon dollars. according to the bank's analyst, interest rates are going . to accommodate this situation Lizard decided to increase the amount of short-term loans by 8 . interest rates rise from 5% to 6% , what is the expected change in income?

Answer 1

Lizard bank has a negative gap of -28 million dollars. This means that the bank' s assets (mostly loans) is 28 million less than the bank' s liabilities (CDs, Savings banks accounts, other deposits by customers etc.). Since, the assets are less than liabilities thus, there is a negative gap of -28 million dollars.

At 5 % interest rae, Lizard bank has to pay (28,000,000 * 0.05) = $ 1,400,000 interest to its customers.

By adding short-term loans of 8 million (since a proper denomination is not given assuming 8 million here) the net gap will become (- 28 + 8) = 20 million dollars

So, at 6 % interest rate, Lizard back will now have to pay (20,000,000 * 0.06) = $ 1,200,000 interest to its customers.

Finally the expected change in income is of 2 million dollars. The Lizard bank has to now pay 2 million dollars less as interst to its customers.