Question

19-1

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

Assets			Liabilities
Floating-rate mortgages   (currently 12% annually)	$	58	NOW accounts   (currently 8% annually)	$	78
30-year fixed-rate loans   (currently 9% annually)		58	Time deposits   (currently 8% annually)		24
			Equity		14
Total	$	116		$	116

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 1 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

Answer (a)
Interest income
Floating rate interest			58*12%	=	6.96
Fixed rate loan interest			58*9%	=	5.22
		Total Income			12.18
Interest Expenses
NOW accounts			78*8%	=	6.24
Time Deposits			24*8%	=	1.92
		Total Expense			8.16
Net Income		=	12.18 - 8.16		4.02
Answer (b)
If interest rate rise by 1%
Interest income
Floating rate interest			58*13%	=	7.54
Fixed rate loan interest			58*9%	=	5.22
		Total Income			12.76
Interest Expenses
NOW accounts			78*8%	=	6.24
Time Deposits			24*8%	=	1.92
		Total Expense			8.16
Net Income		=	12.76 - 8.16		4.6