A bank has the following balance sheet:

Suppose interest rates rise such that the average yield on rate-sensitive assets increases by 45 basis points and the average yield on rate-sensitive liabilities increases by 35 basis points.

a. Calculate the bank’s CGAP and gap ratio (as defined by regulators).

b. Assuming the bank does not change the composition of its balance sheet, calculate the resulting change in the bank’s interest income, interest expense, and net interest income.

c. Explain how the CGAP and spread effects influence the change in net interest income.

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Assets Rate sensitive Fixed rate Nonearning Total Avg. Rate $ 550,000 7.75% 755,000 265,000 8.75 1,570,000 Liabilities/Equity $ 375,000 Avg. Rate Rate sensitive Fixed rate Nonpaying Total 805,000 6.25% 7.50 390,000 1,570,000