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FRM Part I · FRM Exam Part I · Banks

A bank's balance sheet has rate-sensitive assets of $600 million and rate-sensitive liabilities of $850 million over a one-year horizon. Assuming all rate-sensitive items reprice by the same amount, what is the approximate change in net interest income if market rates rise by 1.5 percentage points?

Net interest income falls by about $3.75 million. The one-year repricing gap is $600 million minus $850 million, or negative $250 million, and multiplying by a 1.5% rate rise gives negative $3.75 million, because liabilities reprice more than assets.

  1. AIncrease of $3.75 million
  2. BDecrease of $3.75 millionCorrect
  3. CDecrease of $12.75 million
  4. DIncrease of $12.75 million

Explanation

Gap = 600 - 850 = -250 million. Change in NII = gap x change in rate = -250 x 0.015 = -$3.75 million. Using 850 x 1.5% = 12.75 ignores offsetting asset repricing; reversing the sign ignores that liabilities reprice faster.

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