Question

If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days, what should happen to this bank's net interest margin?

A. It should fall by 2%

B. It should fall by 0.6%

C. It should fall by 4%

D. It should fall by 1%

E. It should not show any fall

The correct answer is B. Can you explain why though?

Answer 1

If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days then you have to make a calculation of net interest margin i.e if you see the net result will be zero because when interest rate increases on assets it denotes to income and on liabilities it will be considered as liability. But the time factor should be considered net days left in a year will be 270 (360-90).

Net interest margin=2/100 *90/270 =0.66 (when multiplied by 100)