1. Consider the following balance sheet for Popes Creek Bank (in millions) Balan
ID: 2536727 • Letter: 1
Question
1. Consider the following balance sheet for Popes Creek Bank (in millions) Balance Sheet (unit: $ millions) Assets Floating-rate mortgages (currently 10% annually) Liabilities 1-year time deposit (currently 5% 50 annually) 70 30-year fixed-rate loans (currently 7% annually) 3-year time deposits (currently 8% 50 annually) 20 10 100 Equity Total Assets 100 Total Liabilities and Equity a. What is Popes Creek's expected net interest income at year-end? b, what will net interest income be at year-end if interest rates rise by 2%? Using the one-year cumulative repricing gap model, what is the expected net interest income for a 2 percent increase in in interest rates? c. d. What will net interest income be a year-end if interest rates on RSAs increase by 2 percent but interest rate on RSLs increase by 1 percent? Is it reasonable for changes in interest rates on RSAs and RSLs to differ? Why?Explanation / Answer
a)
b)Now Interest Rate Rises by 2% , NOW UNDERSTNAD THAT only Floating rate will change Fixed Interest will not change as per its name it is fixed.
c) Repricing or funding gap is $50m-$70m = $20m. The change in net interest income using the funding gap model is ($20m)*(2%) = $0.4m.
d)
An increase of $0.3m. It is not uncommon for interest rates to adjust in an unequal manner on RSAs versus RSLs. Interest rates often do not adjust solely because of market pressures. In many cases the changes are affected by decisions of management. Thus, you can see the difference between this answer and the answer for part a.
Expected Interest Income: Floating Rate Mortgages $50mn * 10% $5 mn 30-year-fixed rate Loans $50mn * 7% $3.5 mn Total Expected Interest Income(A) $8.5 mn Expected Interest Expense: 1 year Time Deposit $70 mn * 5% $3.5 mn 3 year Time Deposit $20 mn * 8% $1.6 mn Total Expected Interest Expense(B) $5.1 mn Net Interest Income(A-B) $8.5 mn -$5.1 mn $3.4 mnRelated Questions
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