Consider the following information to answer the question: Asset Amount Rate Liabilities rate Rate Sensitive $35...

Consider the following information to answer the question:

Asset	Amount	Rate	Liabilities	rate
Rate Sensitive	$35 000 000	10%	$40 000 000	8%
Fixed rate	$21 000 000	9%	$12 000 000	7%
Non-earning	$4 000 000		$8 000 000

What will be the FI's net interest income at year-end if interest rates do not change?

A. $3.20million

B.$5.30million

C.$1.89million

D.$1.35million

Solutions

Expert Solution

Net interest income refers to the the interest income earned on various assets held after deducting the interest expense being payable on various liabilities.

In the above question , the interest sensitive asset = $35000000 , fixed rate asset = $21000000

So the interest income earned on assets = 10% on rate sensitive asset = 10% *35000000 =$35,00,000

The interest income of fixed interest asset = 9% on fixed rate asset =9% *21000000 = $18,90,000

Now the given liabilities include interest sensitive = $40000000 , fixed interest = $12000000

The interest expense on liabilties which are interest sensitive = 8% * $ 40000000 = $3200000

interest expense on fixed rate liabilities = 7% * $12000000 = $8,40,000

So the net interest income =Total interest income - total interest expense

= ($35,00,000 + $18,90,000) - ($3200000 + $8,40,000)

= $ 13,50,000 = $1.35 million

Thus the net interest income earned at year end is $ 1.35 million.

jeff jeffy answered 1 year ago

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