Banking Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

To determine the expected change in net interest income when interest rates increase by 1%, it's essential to understand the relationship between rate-sensitive assets and rate-sensitive liabilities.

Rate-sensitive assets are those that can change in value or interest income with fluctuations in interest rates, while rate-sensitive liabilities are those that will also change, but in terms of the interest that needs to be paid. In this case, rate-sensitive assets equal $600 million and rate-sensitive liabilities equal $800 million.

When interest rates increase by 1%, the institution will earn an additional 1% on its assets, leading to an increase in interest income. Specifically, the increase in interest income from rate-sensitive assets will be 1% of $600 million, which amounts to $6 million.

However, at the same time, the increase in interest rates also affects liabilities. The institution will incur an additional interest expense of 1% on its rate-sensitive liabilities. Therefore, the increase in interest expense from rate-sensitive liabilities will be 1% of $800 million, resulting in an increase of $8 million in interest outflow.

To calculate the net effect on interest income, we subtract the increase in interest expense from the increase in interest income:

$6 million (increase in interest