(1). If a bank invested $59 million in a two-year asset paying 11 percent intere
ID: 2761993 • Letter: #
Question
(1). If a bank invested $59 million in a two-year asset paying 11 percent interest per year and simultaneously issued a $59 million one-year liability paying 8 percent interest per year, what would be the impact on the bank’s net interest income if, at the end of the first year, all interest rates increased by 2 percentage point? (Input the amount as a positive value. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16))
Net interest income will by $ million.
(2). Countrybank offers one-year loans with a stated rate of 12 percent but requires a compensating balance of 7 percent. What is the true cost of this loan to the borrower? (Round your answer to 2 decimal places. (e.g., 32.16))
True cost %
Explanation / Answer
1)Net interest income is not affected in the first year. However, it will decrease in the second year as calculated below: year 1 year 2 diff interest income 6.49 6.49 interest expense 4.72 5.90 net interest income 1.77 0.59 1.18 The impact is that the bank's net interest income will decrease by $1.18 million in the 2nd year. 2) The true cost of the loan = 12/(1-0.07)=12.90%
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