Interest-sensitive assets are those assets on a bank's balance sheet that are sensitive to changes in interest rates. The most common interest-sensitive assets are loans and investments. Loans are typically interest-sensitive because they have a fixed interest rate that does not change with fluctuations in the market. Investments, on the other hand, are typically variable-rate instruments, meaning that their interest rates will change as market rates fluctuate. As a result, when interest rates rise, the value of investments will typically fall, while the value of loans will remain relatively unchanged. Is the difference between interest sensitive assets and interest sensitive liabilities? Interest sensitive assets are those assets on a bank's balance sheet that are sensitive to changes in interest rates. Interest sensitive liabilities are those liabilities on a bank's balance sheet that are sensitive to changes in interest rates. The two concepts are related, but they are not the same. What is interest sensitivity analysis? Interest sensitivity analysis is the process of assessing how changes in interest rates will impact a bank's financial position. This includes both the impact on the value of the bank's assets and liabilities, as well as the impact on net interest income.

When interest rates rise, the value of a bank's assets typically falls, while the value of its liabilities increases. This can put pressure on the bank's net interest margin - the difference between the interest income earned on its assets and the interest expense paid on its liabilities.

To offset this, banks will typically increase the interest rates they charge on loans and other products. They may also reduce the interest rates paid on deposits.

Interest sensitivity analysis can help a bank to identify potential problems and take steps to mitigate them. For example, if a bank has a large number of loans with variable interest rates, it may choose to hedge its interest rate risk by entering into interest rate swap agreements. What happens if a bank has more rate sensitive assets than liabilities? If a bank has more rate sensitive assets than liabilities, it will be more sensitive to changes in interest rates. This means that if interest rates rise, the bank's profits will fall and if interest rates fall, the bank's profits will rise.

How banks measure interest rate risk? Interest rate risk is the risk that a change in interest rates will adversely affect a bank's financial performance. When interest rates rise, the value of a bank's loans and securities falls, and when interest rates fall, the value of a bank's deposits declines.

Banks use a number of different techniques to measure interest rate risk. One common approach is to use duration analysis. This involves calculating the sensitivity of a bank's assets and liabilities to changes in interest rates. Another approach is to use Monte Carlo simulations, which involve using computer models to generate a range of possible interest rate scenarios and then testing how a bank's portfolio would perform under each scenario.

#### How can interest-sensitive gap be reduced?

Interest-sensitive gap is the difference between the interest income a bank earns on its interest-bearing assets and the interest expense it incurs on its interest-bearing liabilities. The size of the gap is affected by the mix of assets and liabilities, as well as changes in interest rates.

There are a few ways to reduce the interest-sensitive gap:

1. Increase the proportion of interest-bearing assets to interest-bearing liabilities. This can be done by increasing the amount of loans and investments, and decreasing the amount of deposits.

2. Increase the interest rate on loans and investments, and decrease the interest rate on deposits.

3. Change the mix of assets and liabilities. This can be done by increasing the proportion of variable-rate assets and liabilities, and decreasing the proportion of fixed-rate assets and liabilities.

4. Increase the amount of hedging. This can be done by using more interest rate swaps and other derivatives to hedge against interest rate risk.