Calculate Net Interest Income Of Bank From Assets And Liabilities

Question

A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6 percent annually.

1. What is the bank’s net interest income for the current year?
    a. $300,000.
    b. $140,000.
    c. $160,000.
    d. $280,000.
    e. $  80,000.

2. What is the bank’s net interest income in dollars in year 3, after it refinances all of its liabilities at a rate of 6 percent?
    a. -$  60,000.
    b. -$140,000.
    c. +$140,000.
    d. +$  60,000.
    e. +$800,000.

3. What is the bank’s net interest income in dollars in year 3, after it refinances all of its liabilities at a rate of 8 percent?
    a. -$20,000.
    b. -$10,000.
    c. -$15,000.
    d. +$20,000.
    e. +$10,000.

4. 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?
    a. 6.5 percent.
    b. 7.0 percent.
    c. 7.5 percent.
    d. 8.0 percent.
    e. 8.5 percent.

Summary

This question belongs to Finance and it is about a bank which has $4 million in liabilities and $5 million in assets with difference in interest rates. Various questions like net interest income, interest income if the bank refinances its liabilities, etc have been answered in the solution.

Total Word Count 147

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