A commercial bank has $100 of fixed-rate liabilities and $50 of fixed-rate assets. If the interest...

A commercial bank has $100 of fixed-rate liabilities and $50 of fixed-rate assets. If the interest rate decreases from 10% to 5%, the change in net profit is ( ).

a. $2.5

b. $25

c. $0

d. $-2.5

Solutions

Expert Solution

Given that,

Earlier, Liabilities = $100 ans Assets =$50

Interest rate =10%

Hence,

interest on liabilities to be paid = liabilities×interest%

Interest on liabilities to be paid= $100×10% = $10

Interest on Assets to be recieved = assets× interest%

Interest on assets to be recieved =$50×10% = $5

Hence net loss = interest to be paid- interest to be recieved = $10--$5 = $5 (loss as paid is more than recieved.

Now, everything else remains same but interest rate now =5%

Similar to above,

interest to be paid = $100×5% = $5

Interest to be recieved =$50×5%= $2.5

Net loss = interest to be paid- interest to be recieved = $5-$2.5 = $2.5( new loss, it is a loss because still interest paid is more than interest recieved)

Change is: $5 (earlier loss) - $2.5(now loss) = $2.5(loss)

It is still a loss and not profit. There is a reduction in loss by $2.5. Hence ans-(d)

Rahul Sunny answered 2 years ago

Next > < Previous

Related Solutions

If a bank has more rate-sensitive assets than liabilities, a fall in interest rates will reduce...

If a bank has more rate-sensitive assets than liabilities, a fall in interest rates will reduce bank profits, while a rise in interest rates will raise bank profits. Pl elaborate this statement. Thanks

Suppose a bank has $100 million in assets, and $90 million in liabilities. If assets increase...

Suppose a bank has $100 million in assets, and $90 million in liabilities. If assets increase 5%, and liabilites increase 10%, then how much did bank’s equity change? (Answer is 6.0) please show me how with work!!!

Consider a bank that has the following assets and liabilities: Loans of $100 million with a...

Consider a bank that has the following assets and liabilities: Loans of $100 million with a realized rate of 5% Security holdings of $50 million earning 10% interest income Reserves of $10 million Savings accounts of $100 million interest of 2.5% Checking deposits of $30 million which pay no interest Determine the profits for this bank. (Hint: The bank earns income, or revenues, not only from its loans but also from any securities it holds!)

Consider a bank that has the following assets and liabilities: Loans of $100 million with a...

Consider a bank that has the following assets and liabilities: Loans of $100 million with a realized rate of 5% Security holdings of $50 million earning 10% interest income Reserves of $10 million Savings accounts of $100 million interest of 2.5% Checking deposits of $30 million which pay no interest Set up the balance sheet for this bank. (Hint: Remember that assets + liabilities = equity or net worth!) Determine the profits for this bank. (Hint: The bank earns income,...

Consider a bank that has the following assets and liabilities: Loans of $100 million with a...

Consider a bank that has the following assets and liabilities: Loans of $100 million with a realized rate of 5% Security holdings of $50 million earning 10% interest income Reserves of $10 million Savings accounts of $100 million interest of 2.5% Checking deposits of $30 million which pay no interest Carefully explain what the impact would be on a bank’s ROA and ROE from increased use by a bank of off-balance sheet (OBS) activities.

4) Assets Liabilities RR $10 Dd $100 Bonds $90 a. A deposit of $50 into this...

4) Assets Liabilities RR $10 Dd $100 Bonds $90 a. A deposit of $50 into this bank would do what to reserves, both required and excess? b. The $50 deposit would enable this bank to make a maximum loan of how much? c. This deposit of $50 would enable the banking system to increase loans by how much? d. What happens to the money supply when a loan is repaid?

Assume a bank has the following balance sheet (in 000s). Assets Potential rate change Amount Liabilities...

Assume a bank has the following balance sheet (in 000s). Assets Potential rate change Amount Liabilities Potential rate change Amount Cash n.a $200 90-day CDs 0.25% $200 6-month T-bonds 1.00% $400 360-day CDs 0.75% $400 2-year commercial loans 2.00% $300 Time Deposits 2-year 2.00% $800 5-year fixed rate loans 2.50% $600 Stockholder’s equity n.a $100 Total $1,500 Total $1,500 Determine the 1-year cumulative GAP. What is the impact on net interest income (NII), if interest rates are expected to increase...

Assets Liabilities Rate-Sensitive $375 million Rate-Sensitive $450 million Fixed-rate $525 million Fixed-rate $450 million What would...

Assets Liabilities Rate-Sensitive $375 million Rate-Sensitive $450 million Fixed-rate $525 million Fixed-rate $450 million What would happen to bank profits if the interest rates in the economy decrease by 2%? Specifically, would the profits increase or decrease? How much?

Crazy Quilting, LLC has current assets of $100,000, fixed assets of $400,000, current liabilities of $50,000,...

Crazy Quilting, LLC has current assets of $100,000, fixed assets of $400,000, current liabilities of $50,000, and long-term liabilities of $250,000. What is their shareholder’s equity? If they sell 1,000 shares of stock for $100 each, what will change on their balance sheet? What changes on their income statement? If they sell some of their old equipment for $75,000, that has a depreciated value of $50,000, what will change on their balance sheet? What will their income statement show?

Kroeger, Inc., has current assets of $2,320, net fixed assets of $10,800, current liabilities of $1,425,...

Kroeger, Inc., has current assets of $2,320, net fixed assets of $10,800, current liabilities of $1,425, and long-term debt of $4,130. (Enter your answer as directed, but do not round intermediate calculations.) Requirement 1: What is the value of the shareholders’ equity account for this firm? Shareholder's equity $ Requirement 2: How much is net working capital? Net working capital

Subjects