Question

Consider the following balance sheet for Watchover Savings, Inc. (in millions):

Assets			Liabilities and Equity
Floating-rate mortgages      (currently 12% p.a.)	$	86	Now deposits      (currently 8% p.a.)	$	118
30-year fixed-rate loans      (currently 9% p.a.)		103	5-year time deposits      (currently 8% p.a.)		26
			Equity		45
Total	$	189	Total	$	189

a.	What is Watchover’s expected net interest income at year-end? (Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Net interest income

$  million

b.	What will be the net interest income at year-end if interest rates rise by 1 percent? (Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Net interest income

$  million

c.	Using the one-year cumulative repricing gap model, what is the change in the expected net interest income for a 1 percent increase in interest rates? (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Net interest income

$  million

Answer 1

                            [$ In Millions]

a) Expected net interest income at year-end

= [Interest Income earned on Assets – Interest payment on Liabilities]

= ($86*12/100 + $103*9/100) – ($118*8/100 +$26*8/100)

= ($10.32 + $9.27) – ($9.44 + $2.08)

  = $19.59 - $11.52

  = $8.07

Net interest income

$ 8.07 million

[Note : it can also take it as Interet income - Interest Expenses]                                                                

b) Net interest income at year-end if interest rate rises by 1%

= [Interest Income earned on Assets – Interest payment on Liabilities]

= ($86*13/100 + $103*9/100) – ($118*9/100 +$26*8/100)

  = ($11.18 + $9.27) – ($10.62+$2.08)

= $20.45 -$12.70

= $7.75

Note: a decrease of $.26 million compare to option a

Net interest income

$ 7.75 million

C) Using the one-year cumulative repricing gap model, the change in the expected net interest income for a 1 percent increase in interest

    Change in the expected net interest income = $86 - $118

                                                                          = -$32

     Change in the expected net interest income for a 1 percent increase in    interest   = (-$32) (.01)

                = -$.32 million.

Net interest income

-$.32 million