interest rate risk

Question 1

will or can an asset/liability have its interest rate changed within a specific time?

Answer 1

yes if rate sensitive

no if not

Question 2

what does a positive gap in the repricing model for NII show?

Answer 2

a rise in interest rates would increase net interest income

Question 3

what does a negative gap in the repricing model for NII show?

Answer 3

a rise in interest rates would decrease net interest income

Question 4

what are the weaknesses of NII? (3)

Answer 4

increasing interest rates can decrease MV of assets and liabilities, thus affect the net worth.
it is therefore only a partial measure of interest rate risk.
NET Gap may be zero but timing of cashflows may be different, leading to reinvestment/refinancing risk.

Question 5

how is the GAP calculated?

Answer 5

within a time period group, subract assets from liablites, then times by rate of change. careful with negatives!

on formula sheet.