Sample Research Paper On Answers To Finance

- Periodic gap is the gap of each time interval, and its potential impact on the income as a result of interest changes. Cumulative gap is the sum of periodic gaps over a period of time. It is simply the aggregate of all periodic gaps.
- The three factors include:
- Rate Effects: It is the changes in the income occurring because of the changes in the interest rate. It is due to the difference between the actual and expected interest rate forecasted by the bank.
- Composition Effect: It is the difference between the actual and expected income because of the changes of assets and liability mix of the bank.
- Volume Effect: It is the changes in the volume of earning assets and interest-bearing liabilities.
- It is an easy concept to understand and, as a result it is widely used by the banks. It is extremely easy to understand. It is also very good, because small interest rate changes do not deviate the expected forecast much. However, a sudden change with a large magnitude is going to make the analysis wrong, and as a result the analysis may become faulty if the impact of the change is large.
- Earnings Sensitivity Analysis takes into account the changes in yields of assets and interest cost of liabilities. It is a quick way of responding to the changes. Income statement Gap analysis takes into account the speed of change and re-pricing of assets given an interest rate change. The similarity of the two models of taking into account interest rate changes. The difference between the two models of speed of changes and repricing an asset.
- The relationship between the models is too simplistic because any changes in the difference between the two models can be reconciled by using speeds of changes in the interest rate.
- Rate affects the net interest income by affecting the assets returns and liabilities interest.
- Volume affects the size of the change in the net interest income.