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Answer: NII will increase by $550,000.
## Explanation To calculate the impact on Net Interest Income (NII), we need to calculate the change in interest income from assets minus the change in interest expense from liabilities. ### Step 1: Calculate weighted interest-sensitive assets - Federal fund loans: $50M × 1.0 = $50M - Security holdings: $50M × 1.2 = $60M - Loans and leases: $350M × 1.45 = $507.5M - **Total weighted assets = $50M + $60M + $507.5M = $617.5M** ### Step 2: Calculate weighted interest-sensitive liabilities - Interest-bearing deposits: $250M × 0.75 = $187.5M - Money-market borrowings: $90M × 0.95 = $85.5M - **Total weighted liabilities = $187.5M + $85.5M = $273M** ### Step 3: Calculate net interest sensitivity gap - **Net sensitivity gap = Weighted assets - Weighted liabilities = $617.5M - $273M = $344.5M** ### Step 4: Calculate NII impact - Interest rate change = 50bp = 0.50% - **NII change = Net sensitivity gap × Interest rate change = $344.5M × 0.50% = $1,722,500** Since the net sensitivity gap is positive ($344.5M), an increase in interest rates will **increase** NII by $1,722,500. **Therefore, the correct answer is B: NII will increase by $1,722,500.**
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Sunset saving Bank currently has the following interest-sensitive assets and liabilities on its balance sheet with the interest-rate sensitivity weights noted.
| Interest-sensitive assets | $ (millions) | Rate sensitivity index |
|---|---|---|
| Federal fund loans | 50 | 1 |
| Security holdings | 50 | 1.2 |
| Loans and leases | 350 | 1.45 |
| Interest-sensitive liabilities | $ (millions) | Rate sensitivity index |
| Interest-bearing deposits | 250 | 0.75 |
| Money-market borrowings | 90 | 0.95 |
Suppose the federal funds interest-rate increases by 50bp. How will the bank's net interest income (NII) be affected?
A
NII will increase by $550,000.
B
NII will increase by $1,722,500.
C
NII will decrease by $550,000
D
NII will decrease by $1,722,500.