Consider the following income statement for WatchoverU Savings Inc. (in millions

Question

Consider the following income statement for WatchoverU Savings Inc. (in millions):

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))

What will be the net interest income at year-end if interest rates rise by 3 percent? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

Assets Liabilities   Floating-rate mortgages
  (currently 12% annually) $ 61   NOW accounts
  (currently 8% annually) $ 81   30-year fixed-rate loans
  (currently 9% annually) 61   Time deposits
  (currently 8% annually) 29   Equity 12   Total $ 122 $ 122

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 3 percent? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))

  Net interest income $ million

Explanation / Answer

net intrest on 12% floting mortgages = $ 61 m*12%=7.32m

on 9% fixed rate mortgages=$ 61 m*9%=5.49m

so the total net intrest income= 7.32m+5.49m=$12.71m

When the intrest rise by 3%

the net intrest on floting mortgages = $ 61m*15% (12%+3% {rise in the intrest rate)=$9.15m

fixed mortgages =$ 61m * 9% ( the rise in the intrest rate will not effect the fixed rate) =$ 5.49m

so total net income after rise in the market rates=$ 9.15m+$ 5.49m=$ 14.64m

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