Suppose Bank A has $35 million in rate-sensitive assets, $70 million in fixed rate assets, $70 million in rate sensitive liabilities, and $35 million in fixed rate liabilities and equity capital. Calculate the change in Bank A’s profit as a result of an increase in market interest rates of 2 percentage points.

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Interest Rate Risk Measurement and Management

Interest rate risk is a risk that arises due to fluctuation in interest rates. These interest rate risks control the value of fixed-return assets. Interest rates and the value of investments have an indirect relationship. When interest rates increase, the price of bonds or investments falls. Short-term investments carry lower risk than long-term investments as they have a short maturity period.