Banking Practice Exam

To determine the expected change in net interest income when rates fall by 1%, it's essential to understand how the rates affect both the rate-sensitive assets and liabilities.

Rate-sensitive assets amount to $500 million, meaning that for every 1% decrease in interest rates, the income from these assets decreases by $5 million (1% of $500 million). Conversely, rate-sensitive liabilities total $400 million, which means that a 1% decrease in rates would also result in a decrease in interest expenses by $4 million (1% of $400 million).

To calculate the net change in net interest income, subtract the decrease in income on rate-sensitive assets from the decrease in expenses on rate-sensitive liabilities:

- Decrease in income from assets: $5 million (when rates fall by 1%)

- Decrease in expenses from liabilities: $4 million (when rates fall by 1%)

Now, combine these effects to find the overall impact on net interest income:

Net interest income change = Decrease in income from assets - Decrease in expenses from liabilities

Net interest income change = -$5 million + $4 million = -$1 million.

Therefore, net interest income is expected to decrease by $1 million when rates fall by