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i) Assume an immediate and sustained 1 percent across-the-board rise in interest rates. Based on a review of Exhibit 3, discuss how one would use interest rate-sensitivity gap information to estimate the impact of rising interest rates on the earning of Norwest Corporation.
Interest rate-sensitivity gap information serves as a preparatory tool for Norwest Corporation to estimate the impact of rising interest rates on their earnings. It is most popular interest rate hedging strategy use in today which is require management to perform an analysis of the maturities and repricing opportunities associated with interest-bearing assets and deposits and other borrowings. Periodic GAP is compares interest sensitive assets with interest sensitive liabilities across each of the different time bucket and in a measure of the timing of changes in interest rates on net interest income. The Gap of the corporation is mostly positive for all the time periods except for the investments that are of less than six month maturity. A Positive GAP such as in the 6 months-1 year through 5 years shown that Norwest Corporation has more interest sensitive assets than interest sensitive liabilities. When interest rate rise of 1 percent during the time interval, this holding company’s net interest margin will increase because the interest revenue generated by assets will increase more than cost of borrowed funds. In contrast, a negative GAP such as shown in Exhibit 3 the period within 6 months indicates that Norwest Corporation has more interest sensitive liabilities than interest sensitive assets. When interest rate increase of 1 percent during the time interval, Norwest Corporation’s net interest margin will decrease because the rising cost associated with interest-sensitive liabilities will exceed the increase in interest revenue. In addition, Cumulative GAP measures the sum of periodic

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