Question

6.2 EF

A. Calculation of Net Interest Income for each bank :-

For US Bank

Asset = 120*1.5= $180 million

Interest on asset= 180*6.5%= $11.7 million

Interest on Liability = 180*4.75%= $8.55 million

=> Net Interest Income= 11.7-8.55 = $3.15million

ROA= (3.15/180)*100= 1.75%

For UK Bank :-

Asset = 180/1.5= £120 million

=> Net Interest Income= 120(6.5-4.75)= £2.10 million

ROA= (2.10/120)*100= 1.75%

B. Calculations when spot rate is $1.6820/£

For us Bank :-

Asset= 120*1.6820= $201.84 million

Interest on above= 201.84*6.5%= $13.1196million

Interest on Liability = 180*4.75%= $8.55 million

=> Net Interest Income= $ 4.5696milliom

ROA= (4.5696/201.84)*100= 2.26%

For UK Bank :-

Asset= 180/1.6820= £107.02 million

Interest on above= 107.02*6.5%= £6.9653million

Interest on Liability= 120*4.75%= £5.7 million

=> NII= 6.9653-5.7= £1.2653million

ROA= (1.2653/107.02)*100= 1.1823%

D. When the currency swap takes place, the US bank will receive interest on $180million and will remain unaffected by the change in spot $/£ exchange rate. Similarly, UK bank will receive interest on £ 120 million and will not be affected by exchange rate fluctuations.

Therefore, US bank will give 180*6.5%= $11.7 million to the agent. He will deduct $2.925 million (.25%of 11.7) as his fees and remit balance amount i.e $8.775million to bank

Similarly, UK bank will give 120*6.5%= £7.80million to the agent. He will deduct £1.95 million(0.25% of 7.80) as his fees and remit balance amount i.e £5.85 million to the bank.

Please help with E and F

d. For each loan, calculate the bank’s ROA (%) by dividing the interest income by the funds tied up.

e. For each loan, calculate the increase in yield to the bank from the compensating balance requirement, i.e. the yield (%) to the bank in excess of the Base Interest Rate + Loan Origination Fee

Excess Yield = ROA – (Base Interest Rate + Loan Origination Fee).

Answer 1

D.   ROA = Net Income / Total Assets

      For US Bank : Interest on Asset = $11.7 Million - $2.925 = $8.775 Million

                                   Interest on Liability = $8.55 Million

                                  Net Interest Income = $8.775 Million - $ 8.55 Million = $0.225 Million

                    ROA (%) = ($0.225 Million / $180 Million)*100 = 0.125%

         For UK Bank : Interest on Asset = £7.8 Million - £1.95 Million = £5.85 Million

                                   Interest on Liability = £5.7 Million

                                  Net Interest Income = £5.85 Million - £5.7 Million = £0.15 Million

                    ROA (%) = (£0.15 Million / $120 Million)*100 = 0.125%

E. Excess Yield = ROA – (Base Interest Rate + Loan Origination Fee).

       For US Bank

       Excess Yield = 1.75% - [6.5% -(4.75%+0.25%)] = 0.25%

      For UK Bank

       Excess Yield = 1.75% - [6.5% -(4.75%+0.25%)] = 0.25%

       When Spot Rate is Changed

      For US Bank

       Excess Yield = 2.26% - [6.5% -(4.75%+0.25%)] = 0.76%

      For UK Bank

       Excess Yield = 1.1823% - [6.5% -(4.75%+0.25%)] = 0.3177%