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      Question

      Net interest position of the bank has which of the

      following characteristics?
      A if the bank has more interest earning assets than the liabilities on which it pays interest, the bank is exposed to an additional interest rate risk Correct Answer Incorrect Answer
      B It arises when interest rate earned on assets changes while the cost of funding of the liabilities remained the same Correct Answer Incorrect Answer
      C A large positive net interest position accounts for most of the profit generated by many financial institutions Correct Answer Incorrect Answer
      D A and B Correct Answer Incorrect Answer
      E A, B and C Correct Answer Incorrect Answer

      Solution

      Net Interest income (NII) is the difference between the interest earned on the bank’s assets (i.e. loans and advances given by it) and interest paid by bank on the liabilities (i.e. deposits and other borrowings by banks). Positive NII will lead to higher profitability. NII position of the bank will change if either of the interest changes whle the other remains constant. For example, if interest paid on deposits increases while interest charged on loans remains fixed, the NII of the bank will reduce.

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