Question

Rockets Bank has a gap of -27 million dollars. According to the bank's analyst, interest rates are going up in the future. To accommodate this situation rockets decided to increase the number of short-term loans by 11 million dollars. if interest rates rise from 3% to 6%, what is the expected change in income?

Answer 1

Ans) Interest rate gap is a term used when the interest bearing liabilities are higher than interest bearing assets of the bank.The interest bearing assets are loans and advances where as interest bearing liabilities are deposits in the bank etc hence a negative gap occured when interest bearing liabilities are higher than the assets.The gap of the Rocket bank is - 27 million dollar the interest income with interest rate 3% is = -27 *0.03 = - 0.81.New loan to be given is of 11 million dollar hence the gap is -27+11= -16 million dollar.At 6% interest rate the amount of interest is -16*0.06= -0.96 million.hence net change in income is -0.96-(-0.81) = -0.96+0.81= -0.15 million as expected income.