Question

Consider the following income statement for WatchoverU Savings Inc. (in millions): Assets Liabilities Floating-rate mortgages (currently 12% annually) $ 63 NOW accounts (currently 8% annually) $ 83 30-year fixed-rate loans (currently 9% annually) 63 Time deposits (currently 8% annually) 26 Equity 17 Total $ 126 $ 126 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 $ 4.51 million b. What will be the net interest income at year-end if interest rates rise by 1 percent? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Answer 1

(a)- Watchover’s expected net interest income at year-end

Interest Income = [$63 x 12%] + [$63 x 9%]

= $7.56 Million + $5.67 Million

= $13.23 Million

Interest Expenses = [$83 x 8%] + [$26 x 8%]

= $6.65 Million + $2.08 Million

= $8.72 Million

Therefore, the net interest income at year-end = Interest Income - Interest Expenses

= $13.23 Million – $8.72 Million

= $4.51 Million

“Watchover’s expected net interest income at year-end = $4.51 Million”

(b)- The net interest income at year-end if interest rates rise by 1 percent

Interest Income = [$63 x (12% + 1%)] + [$63 x 9%]

= $8.19 Million + $5.67 Million

= $13.86 Million

Interest Expenses = [$83 x (8% + 1%)] + [$26 x 8%]

= $7.47 Million + $2.08 Million

= $9.55 Million

Therefore, the net interest income at year-end = Interest Income - Interest Expenses

= $13.86 Million – $9.55 Million

= $4.31 Million

“The net interest income at year-end if interest rates rise by 1 percent = $4.31 Million”