Explanation:
The Dollar IS GAP = Interest-Sensitive Assets (ISA) - Interest-Sensitive Liabilities (ISL) = $490.0 million - $610.0 million = -$120.0 million.
The Relative IS GAP = Dollar IS GAP / ISA = -$120.0 / $490.0 = -0.2449 (approx. -0.245).
The Interest-Sensitivity Ratio (ISR) = ISA / ISL = $490.0 / $610.0 = 0.8033 (approx. 0.803).
Since the bank has a negative IS gap (or ISR < 1), its liabilities are repriced faster than its assets. Thus, rising interest rates will increase interest expense more than interest income, lowering the net interest margin (NIM).
$490.0 million and interest-sensitive liabilities (ISL) of $610.0 million. Recall that the relative interest-sensitive gap (aka, Relative IS GAP) is equal to the Dollar IS GAP divided (aka, scaled) by the size of the bank (where IS assets is a valid measure of size). Respectively, what is the bank’s relative IS GAP; its interest-sensitivity ratio (ISR); and the impact of rising interest rates on its net interest margin (NIM)?A
The Relative IS GAP is -120.0; the ISR is 1.245; rising interest rates will lower the NIM
B
The Relative IS GAP is -0.245; the ISR is 0.803; rising interest rates will lower the NIM
C
The Relative IS GAP is -0.245; the ISR is 1.245; rising interest rates will increase the NIM
D
The Relative IS GAP is +4.08; the ISR is 0.803; rising interest rates will increase the NIM
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