Question

A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pretax net interest income will be __________.

Answer 1

Answer:

$300,000

Explanation:

Data provided in the question;

Interest rate spread of the bank = 150 basis points

Earning assets funded by interest-bearing liabilities = $30 million

Now,

The new interest rate spread = 150 basis points - 50 basis points

or

The new interest rate spread = 100 bps

or

The new interest rate spread = 1%

Therefore,

the bank's new pretax net interest income will be

= $30 million × 1%

= $30,000,000 × 0.01

= $300,000