If a bank invested $67 million in a two-year asset paying 12 percent interest pe

Question

If a bank invested $67 million in a two-year asset paying 12 percent interest per year and simultaneously issued a $67 million one-year liability paying 9 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))

If a bank invested $67 million in a two-year asset paying 12 percent interest per year and simultaneously issued a $67 million one-year liability paying 9 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))

Explanation / Answer

We can say without calculations: As all interest rates are rising, the net income will remain unchanged

Calculations below:

Interest earned will be 67*12%=8.04 million

Interest paid will be 67*9%=6.03 million

Net Interest income will be 8.04-6.03=2.01 million

At the end of first year,

Interest earned will be 67*14%=9.38 million

Interest paid will be 67*11%=7.37 million

Net interest income will be 9.38-7.37=2.01 million

Hence, net interest income will remain same

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