Question

Consider the following income statement for WatchoverU Savings Inc. (in millions): Assets Liabilities   Floating-rate mortgages   (currently...

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

Homework Answers

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

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