Scandia Bank has issued a one-year, $1million CD paying 5.75 percent to fund a one-year loan paying an interest rate of 6 percent. The principal of the loan will be paid in two installments, $500,000 in six months and the balance at the end of the year.
a. What is the maturity gap of Scandia Bank? According to the maturity model, what does this maturity gap imply about the interest rate risk exposure faced by Scandia Bank?
b. Assuming no change in interest rates over the year, what is the expected net interest income at the end of the year?
c. What would be the effect on annual net interest income of a 2 percent interest rate increase that occurred immediately after the loan was made? What would be the effect of a 2 percent decrease in rates?
d. What do these results indicate about the ability of the maturity model to immunize portfolios against interest rate exposure?