Question

Consider the following Balance Sheet for Total Caribbean Bank(TCB) (in millions)

ASSETS			LIABILITIES
Floating rate mortgages	120		Demand deposits	110
(currently 12% annually)			(currently 3% annually)
30 years fixed rate loans			1 year CD	50
(currently 7% annually)	80		(currently 6% annually)
			Equity	40
	200			200

a.      What is TCB expected net interest income (NII) at year end? (1mark)

b.     What is TCB expected net interest income at year end if interest rates grew by 500 basis points. (1 mark)

c.      What is TCB expected net interest income at year end if interest rates fell by 200 basis points on assets, but decline by 4% on liabilities. (2 marks)

yes, this is correct

Answer 1

ANSWER

a.
Calculation of net interest income at year end
Net interest income	Interest income - Interest expense
Net interest income	20-6
Net interest income	$14	million
Interest income	(120*0.12)+(80*0.07)
Interest income	$20	million
Interest expense	(110*3%)+(50*6%)
Interest expense	$6	million
b.
Calculation of expected net interest income
Net interest income	Interest income - Interest expense
Net interest income	30-14
Net interest income	$16	million
Interest income	(120*0.17)+(80*0.12)
Interest income	$30	million
Interest expense	(110*8%)+(50*11%)
Interest expense	$14	million
Interest rate above has increased by 5% which is 500 basis point
c.
Calculation of expected net interest income
Net interest income	Interest income - Interest expense
Net interest income	20-6
Net interest income	$13	million
Interest income	(120*0.10)+(80*0.05)
Interest income	$16	million
Interest expense	(110*1%)+(50*2%)
Interest expense	$2	million
Interest rate above for assets has increased by 200 basis point which is 4% decrease

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