1. A bank only holds variable rate loans, which yield the market rate plus 3%, on the asset side. It funds half of them with rate insensitive deposits that pay 1% and the other half with money market accounts which pay market rates plus 1.5%. If interest rates increase by 100 basis points, the bank net interest margin (net interest income/assets) will:

(a) increase by 50 basis points
(b) decrease by 50 basis points
(c) will not change
(d) none of the above

2.[follows from 1] Suppose the bank decides to double its variable rate loans, keeping the same liability mix (of course doubling liabilities as well). If interest rates now decrease by 200 basis points reaching zero, the bank net interest margin is:

(a) doing down by 50 basis points
(b) 1.75%
(c) zero
(d) none of the above

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