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

Explanation / Answer

a) Expected Net Interest Income:

Expected Interest Income = $61m × 0.12 + $61m × 0.09 = 7.32 + 5.49 = 12.81m

Expected Interest Expense = $81m × 0.08 + $29m × 0.08 = 6.48 + 2.32 = 8.8m

Expected Net Interest Income = $12.81m-$8.8m = $ 4.01m

b) Net Interest Income at year end if interest rate rises by 3%:

Net Interest Income =($61m ×0.15+$61m × 0.09) -($81m × 0.11 + $29m × 0.08)

                                    = 9.15 + 5.49 - 8.91-2.32

                                      = 14.64- 11.23 = 3.41m

At increase in interest rates by 3% the Net Interest Income is 3.41million

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