Question

If a bank invested $65 million in a two-year asset paying 11 percent interest per year and simultaneously issued a $65 million one-year liability paying 8 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 decrease by $ million.

Answer 1

After 1 year the bank will rollover the $ 65 million liability at the new market interest rate of 10 %. (8+2). This will result in interest expense to change from 5.2 Mn to 6.5 Mn. However, interest income will stay the same at $ 7.15 Mn.

	Year 1	Year 2
Interest Income	7,150,000.00	7,150,000.00
Interest Expense	5,200,000.00	6,500,000.00
Net Interest Income	1,950,000.00	650,000.00

Overall net interest income will decrease by $ 1.3 Mn from $ 1.95 Mn to $ 650 K.