Question

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually.

What is the maximum interest rate that it can refinance its $4 million liability and still break even on its net interest income in dollars?

6.5 percent.

7.0 percent.

7.5 percent.

8.0 percent.

8.5 percent.

Answer 1

Maximum interest rate that it can refinance its $4 million liability and still break even on its net interest income in dollars

At this Interest Rate, the Net Interest Expenses shall be equal to the Net Interest Income of the Bank

Net Interest Income = Total Assets x Interest Rate

= $50,00,000 x 6%

= $300,000

Total Liabilities = $40,00,000

Therefore, $300,000 = $400,00,000 x Interest Rate

Interest Rate = $300,000 / $40,00,000

Interest Rate = 0.075 or 7.50%

“Hence, the correct answer choice would be 7.50 percent.”