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The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what would be this bank's net interest margin?

Answer :

Answer:

The banks net interest margin would be 8%.

Explanation:

FORMULA FOR NET INTEREST MARGIN =

INTEREST ON ASSETS - INTEREST ON LIABILITY / EARNING ASSET

Here earning asset = $2000

interest on assets = 11% of 500 + 9% of 1500

NOTE* ( it is given in the question that after 90 days assets worth $500 would be repriced and interest rate on it would rise by 2% , which means for $1500 which won't be repriced will give 9% interest rate and $500 would give 9% + 2% = 11% interest rate )

= $55 + $135

= $190

interest on liability = 6% of $1000 + 4% of 600

NOTE* ( it is given in the question that after 90 days liability worth $1000 would be repriced and interest rate on it would rise by 2% , which means for $600 which won't be repriced will give 4% interest rate and $1000 would give 4% + 2% = 6% interest rate )

= $6 + $24

= $30

FORMULA FOR NET INTEREST MARGIN =

INTEREST ON ASSETS - INTEREST ON LIABILITY / EARNING ASSET

= $190 - $30 / $2000

= .8 x 100 ( multiplying by 100 to get answer in percentage )

= 8%

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