Question

1. If a bank invested $67 million in a two-year asset paying 12 percent interest per year and simultaneously issued a $67 million one-year liability paying 9 percent interest per year, what would be the impact on the bank’s net interest income if, at the end of the first year, all interest rates increased by 2 percentage point? (Input the amount as a positive value. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Net interest income will

by $ million. (note:ANSWER IS NOT 0)

2.

Consider the following income statement for WatchoverU Savings Inc. (in millions):

Assets			Liabilities
Floating-rate mortgages   (currently 13% annually)	$	53	NOW accounts   (currently 9% annually)	$	73
30-year fixed-rate loans   (currently 10% annually)		53	Time deposits   (currently 9% annually)		18
			Equity		15
Total	$	106		$	106

a.	What is WatchoverU’s expected net interest income at year-end? (Do not round intermediate calculations. 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 2 percent? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Net interest income

$ million

3.

Metrobank offers one-year loans with a 11 percent stated rate, charges a 1/2 percent loan origination fee, imposes a 10 percent compensating balance requirement, and must pay a 6 percent reserve requirement to the Federal Reserve. What is the return to the bank on these loans? (Do not round intermediate calculations. Round your answer to 1 decimal place.(e.g., 32.1))

Rate of return

%

Answer 1

Solution:

1) Determining the Impact on the Bank's Net Interest Income if, at the End of the First Year:

Net interest income will not affecte in the first year, but it will decrease in the second year because the interest expense on the debt will increase.

Year 1
Interest income on asset (67M * 12%)	$8,040,000
Less: Interest expense on liability (67M * 9%)	$6,030,000
Net interest income	$2,010,000

Year 2
Interest income on asset (67M * 12%)	$8,040,000
Less: Interest expense on liability (67M * 11%)	$7,370,000
Net interest income	$670,000

2 a) Calculation of the WatchoverU’s expected net interest income at year-end:

Therefore, the WatchoverU’s expected net interest income at year-end is $4 Million.

2 b) Calculation of the Net interest income at year-end if interest rates rise by 2 percent:

When 2% interest rate increases, then the Net interest income will declines as follows,

Therefore, the Net Interest Income will Declines by $0.4 Million ($4 Million - $3.6 million)