Consider the following balance sheet for X Savings (in milllions). Assets Floati

Question

Consider the following balance sheet for X Savings (in milllions).

Assets

Floating rate mortgages $ 40

(Currently 9% annuall7)

30-year fixed rate loans

(Currently 6% annuall7) 40

Total Assets 80

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Liabilities and Equity

1-year time deposits

(currently 5% annually) $ 50

3-year time deposits

(Currently 7% annually) 20

Equity 10

Total liabilities and equity 80

a. What Is X’s expected net interest income at year end ?

b. What will net interest income be if interest rates rise by 1 percent ?

c. Using the cumulative repricing gap model, what is the expected net interest income for a 1 percent increase in interest rates ?

d. What will net interest income be at year end if interest rates on rate sensitive assets increase by 1% but interest rates on rate sensitive liabilities increase by 0.5% ?

Explanation / Answer

a) expected interest income = (40 * 0.09+ 40 * 0.06)=6

expected interest expense = (50 * 0.05 +20* 0.07)=3.9

expected net interest income = 6million - 3.9 million = 2.1 million

b) net interest income = 40 * 0.10+ 40 * 0.06-50*0.06 -20 * 0.07 = 2 million

c)using funding gap mosel

change in net interest income = (40-50) * 0.01 = -0.1million

d) net interest income = 40 * 0.10+ 40 * 0.06-50*0.055 -20 * 0.07 = 2.25 million

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