22-1 Consider the following balance sheet for Watchover Savings, Inc. (in millio

Question

22-1

Consider the following balance sheet for Watchover Savings, Inc. (in millions) Assets Liabilities and Equity Now deposits Floating-rate mortgages (currently 15% pa) 30-year fixed-rate loans (currently 12% pa) (currently 11% pa) 5-year time deposits (currently 11% pa) $74 $112 20 39 97 Equity Total $171 Total a. What is Watchover's expected net interest income at year-end? (Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16)) Net interest income million b. What will be the net interest income at year-end if interest rates rise by 2 percent? (Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16)) Net interest income million c. Using the one-year cumulative repricing gap model, what is the change in the expected net interest income for a 2 percent increase in interest rates? (Negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places. (e.g., 32.16)) Net interest income million

Explanation / Answer

A:Expected net interest income = Interest income -Expenditure

=74*15% + 97*12% - 112*11% - 20*11%

= $8.22 million

B: Expected net interest income = Interest income -Expenditure

= 74*17% + 97*12% - 112*13% - 20*11%

= $7.46 million

C:Funding gap = 112-74 = $38 m

Change using funding gap model = $38 m *2% = 0.76 million

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