Brianna owns a cottage at the beach. She and her family use the property for 30
ID: 2444439 • Letter: B
Question
Brianna owns a cottage at the beach. She and her family use the property for 30 days during the summer season and rent it to unrelated parties for 60 days. The rental receipts amount to $8,000. Total costs of operating the property are as follows:
Mortgage interest
$13,000
Property taxes
5,000
Utilities
2,000
Insurance
1,000
Maintenance
600
In addition, potential depreciation expense is $9,000.
How much of the expenses can Brianna deduct (and specify on which schedule they are included)?
Mortgage interest
$13,000
Property taxes
5,000
Utilities
2,000
Insurance
1,000
Maintenance
600
Explanation / Answer
Refinancing risk is the uncertainty of the cost of a new source of funds that are being used to finance a long-term fixed-rate asset. This risk occurs when an FI is holding assets with maturities greater than the maturities of its liabilities. For example, if a bank has a ten-year fixed-rate loan funded by a 2-year time deposit, the bank faces a risk of borrowing new deposits, or refinancing, at a higher rate in two years. Thus, interest rate increases would reduce net interest income. The bank would benefit if the rates fall as the cost of renewing the deposits would decrease, while the earning rate on the assets would not change. In this case, net interest income would increase.
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