Consider an FI that issues $200 million of liabilities with two years to maturity to finance the purchase of $200 million of assets with a one year maturity Suppose that the cost of funds (liabilities) for the FI is 5 percent per year and the interest return on the assets is 9 percent per year a Ca...

a Over the first year the FI can lock in a profit spread of 4 percent 9 percent 5 percent by borrowi ...

Consider an FI that issues $200 million of liabilities with two years to maturity to finance the

Question:

Consider an FI that issues $200 million of liabilities with two years to to finance the purchase of $200 million of assets with a one year Suppose that the cost of funds (liabilities) for the FI is 5 percent per year and the interest return on the assets is 9 percent per year.
a. Calculate the FI’s profit spread and dollar value of profit in year 1.
b. Calculate the profit spread and dollar value of profit in year 2, if the FI can reinvest its assets at 9 percent.
c. If interest rates fall and the FI can invest in one-year assets at 6 percent in the second year, calculate the FI’s profit spread and dollar value of profit in year 2.
d. If interest rates rise and the FI can invest in one-year assets at 11 percent in the second year, calculate the FI’s profit spread and dollar value of profit in year 2.
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...