Banking Practice Exam

To determine the expected change in net interest income with a 1% decline in interest rates, we can look at the concept of interest rate sensitivity of assets and liabilities.

When interest rates decrease, rate-sensitive assets will yield less, while rate-sensitive liabilities will also be affected but in a different manner. Given that the rate-sensitive assets are valued at $600 million and the rate-sensitive liabilities at $800 million, we can calculate the potential impact on net interest income.

When interest rates fall by 1%, the earnings from the rate-sensitive assets will decrease. For the assets, a 1% drop results in a loss of income calculated as:

- Change in income from assets: \(0.01 \times 600 \text{ million} = 6 \text{ million}\).

On the other hand, the liabilities will also cost less, since there would be lower interest payments. For the liabilities, the income saved due to lower rates can be calculated as:

- Change in expense from liabilities: \(0.01 \times 800 \text{ million} = 8 \text{ million}\).

To calculate the net change in interest income, we subtract the lost income from the assets from the savings made due to the reduced expenses