Assets ($ Mill) Liabilities & Equity Variable rate loans (rate reset in 6 months
ID: 2700221 • Letter: A
Question
Assets ($ Mill)
Liabilities & Equity
Variable rate loans
(rate reset in 6 months)
$ 800
Long Term Liabilities
Equity
$ 600
$ 300
$ 1,200
Use above given information to answer the following question:
What will happen to NII if the average return on RSAs is 7.5% and the average cost of RSLs is 6% and interest rate is expected to increase by 1%?
increase by $3 million
decrease by $3 million
increase by $2.5 million
None of the above.
Assets ($ Mill)
Liabilities & Equity
Investments under 1 year $ 450 Deposits < 1 year $ 2,000 Loans < 1 year $ 750 Short Term Liabilities $ 300Variable rate loans
(rate reset in 6 months)
$ 800
Long Term Liabilities
Equity
$ 600
$ 300
Fixed Rate Assets > 1 year maturity
$ 1,200
Total $3,200 TL + TE $3,200Explanation / Answer
Current expected interest income: $450m*7.5% + $750m*7.5% + 800*7.5% +1200*7.5% = 240m.
Expected interest expense:$2000*6% + 300*6% + 600*6% =174m
Expected net interest income: 240M-174M =$66M.
Now if interest rates rise by 1 percent
After the 100 basis point interest rate increase, net interest income becomes:
=(450*0.085 + 750*0.085 + 800*0.085+1200*0.085)-(2000*0.07 + 300*0.07 + 600*0.07) = $69M
So NII increases by 69-66 = 3M