Question

last answer is not 4.6

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

a.

Net interest income = Floating rate mortgage value x current rate + Fixed rate mortgage value x fixed rate - Now account value x current rate - Time deposits x time deposit rate

Net interest income = 58 x 12% + 58 x 9% - 78 x 8% - 24 x 8%

Net interest income = $4.02 Million

.

b.

***Assuming Time deposits are locked for more than 1 year. Hence no change in interest rates.

Fixed rate mortgage will have no change in interest rate.

.

Net interest income = Floating rate mortgage value x current rate + Fixed rate mortgage value x fixed rate - Now account value x current rate - Time deposits x time deposit rate

Net interest income = 58 x 13% + 58 x 9% - 78 x 9% - 24 x 8%

Net interest income = $3.82 Million

Important Note:

***If time deposits are maturing in one year then answer for option b. will $3.58 million