Question

Consider the following balance sheet for Watchover Savings Inc. (in millions): Assets

(currently 12% p.a.) $ 82

30-year fixed-rate loans (currently 9% p.a.) 101

Liabilities and equity

Now deposits (currently 8% p.a.)

$

116

5-year time deposits (currently 8% p.a.) $29

Equity $38

Total $ 183

a. What is Watchover’s expected net interest income at year-end? (Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

b. What will be the net interest income at year-end if interest rates rise by 3 percent? (Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

c. Using the one-year cumulative repricing gap model, what is the change in the expected net interest income for a 3 percent increase in interest rates? (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Answer 1

a)

Watchover's expected Net interest Income

Current Expected Interest Income : 82*12% + 101*9% = 9.84 + 9.09 = 18.93

Expected Interest Income : 116*8% + 29*8% = 9.28 + 2.32 = 11.60

Expected Net Interest Income = 18.93 - 11.60 = 7.33

b)

Net interest income if interest rate rises by 3%

Rise in interest affects only for floating interest which rises by 3%

Current Expected interest Income : 82*15% + 101*9% = 12.3 + 9.09 = 21.39

Expected Interest Income : 116*11% + 29*8% = 12.76+2.32 = 15.08

Net Interest Income : 21.39 - 15.08 = 6.31

c) Change in expected net interest income for 3%increase with cumulative repricing gap

Repricing gap : $82 - $116 = -$34

Change in Net Interest Income : -$34*.03 = -$1.02