Formosa Independence Bank has the following balance sheet: Assets Cash Investmen
ID: 2789432 • Letter: F
Question
Formosa Independence Bank has the following balance sheet: Assets Cash Investments (1 year) Return Mill S Liabilities and Equity Cost Mill S Short term loans ( 1 year) Total 0.00% 4.00% 6.00% 6.75% $35 Fixed rate deposits $400[Rate sensitive deposits $280|Fed fund borrowings S250 Long term borrowings a 3.50% 2.00% 2.50% 5.50% $240 $360 $75 S119 fixed rate (maturity> 1 year) $710 Equity $ 66 $710 Total The bank's one-year gap between assets and liabilities is (Mill S) A) $425 B) $245 C) $174 D) $140 E) $126 1. 2. If all interest rates on the two sides of balance sheet decline by 65 basis points, when other things are equal, what is the change in net interest income for Formosa Independence Bank over the year? A) $0 B) $1,400,000 C) -$1,400,000 D) $1,592,500 E) -$1,592,500Explanation / Answer
1) Gap is computed as the difference between rate-sensitive assets and liabilities. So, we take assets and liabilities other than fixed rates and zero rates.
ASSETS
Rate sensitive assets = Investements + Short term loans = $400 m + $280 m = $680 m
Liabilities
Rate sensitive liabilities = Rate sensitive deposits + Fed fund borrowings = $360 m + $75 m = $435 m
Gap = $680 m - $435m = $245 m (Option B)
2) 65 basis points decline means decline of 0.65%.
Change in net interest income = Gap x Change in interest rate = $245,000,000 x (-)0.65% = (-)1,592,500 (Option E)