For every $100 in assets, a bank has $40 in interest-rate sensitive assets, and the other $60 in non-interest-rate sensitive assets. The same bank has $50 for every $100 in liabilities in interest-rate sensitive liabilities, the other $50 are in liabilities that are not interest-rate sensitive. If the interest rate on assets increases from 5 to 6 percent, and the interest rate on liabilities increases from 3 to 4 percent, the impact on the bank's profits per $100 of assets will be:

the bank's profits will decrease by $0.10 per $100 of assets

Explanation:

increase in revenues                                        increase in expenses

$40 x 5% = $2                                                   $50 x 3% = $1.50

$40 x 6% = $2.40                                             $50 x 4% = $2    

+$0.40                                                                + $0.50

if the interest rates increase, the bank's revenues will increase by $0.40 for every $100 worth of assets, but its expenses will also increase and in a higher proportion. The bank's expenses will increase by $0.50, so the net change will be $0.40 - $0.50 = -$0.10 or $0.10 less profits

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