a.Calculate the bank’s annual interest income and interest expense b.If the bank
ID: 2562587 • Letter: A
Question
a.Calculate the bank’s annual interest income and interest expense
b.If the bank has $1 million from off balance sheet activities income and $0.5 million of non-interest expense, calculate your bank’s annual profit ( interest income – interest expense)
c.Assuming no taxes, calculate the bank’s ROA and ROE. Which of the two are better measure of the return to the bank’s owners?
d.If $5 million of the bank mortgage loans default, what risk is your bank facing? What will happen to the value of the bank capital?
Assets with current interest rate Liabilities with current interest rate | $20 million Checking deposits SavingS Deposits Reserves Fixed: 0% $5million Variable: 1% Government Variable: 2% | $10 million Fixed: 2% $25 million Securities $35 million Money Market | Variable: 3% Deposit Accounts Bank Capital Fixed: 6% | $10 million Mortgage Loans Short-Term Loans | $10 million To be determined Variable: 7% To be determined Business Loans Fixed: 9% $20 million Total Assets $80 million Total Liabilities $80 millionExplanation / Answer
Interest Income Interest expenses 10,000,000 0.02 200,000 20,000,000 0.01 200,000 35,000,000 0.06 2,100,000 25,000,000 0.02 500,000 10,000,000 0.07 700,000 10,000,000 0.03 300,000 20,000,000 0.09 1,800,000 4,800,000 1,000,000 b If the bank has $ 1 m off balance sheet income and other expense of 0.5 Mill Net profit 4800000-1000000+1000000-500000 4,300,000 c ROA 4,300,000 80,000,000 5.38% ROE 4,300,000 15,000,000 29% d Default in bank mortgage loan is a credit risk. As the profit of the bank is only 4.3 Mill, it will reduce the value of bank capital
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