5.Consider the following bank balance sheet and associated average interest rates. The time frame for rate sensitivity is one year.

Assets Amount Rate Liabilities and Equity Amount Rate

Rate Sensitive 3,000 6.30% Rate Sensitive 2,600 2.80%

Fixed Rate 1,500 7.70% Fixed Rate 1,750 5.10% Nonearning 400 Nonpaying Liabilities 550

Total 4,900 Total 4,900

Calculate the banks GAP, expected net interest income, and net interest margin if interest rates and portfolio composition remain constant during the year. This bank is positioned to profit if interest rates move in which direction?

Calculate the change in expected net interest income and NIM if the entire yield curve shifts 2 percent higher during the year. Is this consistent with the banks static GAP?

Suppose that, instead of the parallel shift in the yield curve in Part b. interest rates increase unevenly. Specifically, suppose that asset yields rise by 200 basis points while liability rates rise by 275 basis points. Calculate the change in net interest income and NIM. Is this uneven shift in rates more or less likely than a parallel shift?