Suppose that for a financial institution, one-year rate sensitive assets (RSAs) are $240 million, and the one-year rate sensitive liabilities (RSLs) are $185 million. Total assets of the financial institution are $400 million.

a) (20 points) Suppose that interest rates fall by 2% on RSAs and go up by 1.2% on RSLs. Calculate the change in spread and the effect of spread change on net interest income (NII). Leave four decimal places in the intermediate steps.

b) (10 points) Specify the effect of the following events from part (a) on the NII as favorable or unfavorable:

Declining rates on RSA

Increasing rates on RSL

Change in the spread

Clearly label your findings (e.g., profit margin = .....) and designate which part of the question you are answering (if there are multiple parts).