FRM Part I · FRM Exam Part I · Banks
A bank funds USD 1,000 million of 10-year fixed-rate loans yielding 6% with USD 1,000 million of deposits repriced every 3 months. The bank's liabilities currently cost 4%. Assuming no other items, a parallel rise of 1.5% in all rates immediately affects net interest income over the next year by approximately:
Net interest income falls by about USD 15 million. The fixed-rate loans keep earning 6%, but the quarterly-repricing deposits cost 1.5% more on USD 1,000 million. Matched notional amounts do not remove this repricing-gap exposure.
- AIncrease of USD 15 million
- BDecrease of USD 15 millionCorrect
- CDecrease of USD 5 million
- DNo change, as the position is matched in notional
Explanation
Fixed-rate assets do not reprice, while liabilities reprice fully within the year. Extra interest cost = 1,000 × 1.5% = USD 15 million, so net interest income falls by about USD 15 million. Matching notional does not match repricing.
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