Question

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

Assets			Liabilities
Floating-rate mortgages   (currently 14% annually)	$	68	NOW accounts   (currently 10% annually)	$	88
30-year fixed-rate loans   (currently 11% annually)		68	Time deposits   (currently 10% annually)		38
			Equity		10
Total	$	136		$	136

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 3 percent? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Net interest income

$  million

Answer 1

a) Interest income = $68 million x 14% + $68 million x 11% = $17 million

Interest expense = $88 million x 10% + $38 million x 10% = $12.6 million

Net interest income = $17 million - $12.6 million = $4.40 million

b) New floating rate mortgage will earn 17% (14 + 3) now and also the NOW accounts will be paid @13% (10 + 3). Whereas fixed rate loans and time deposits interest rates remain fixed @11% and 10% respectively.

Interest income = $68 million x 17% + $68 million x 11% = $19.04 million

Interest expense = $88 million x 13% + $38 million x 10% = $15.24 million

Net interest income = $19.04 million - $15.24 million = $3.80 million