A financial institution has the following market value balance sheet structure: (LG 19-1)

a. The bond has a 10-year maturity, a fixed-rate coupon of 10 percent paid at the end of each year, and a par value of $10,000. The certificate of deposit has a 1-year maturity and a 6 percent fixed rate of interest. The FI expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.)

b. If at the end of year 1 market interest rates have increased page 603 100 basis points (1 percent), what will be the net interest income for the second year? Is the change in NII caused by reinvestment risk or refinancing risk?

c. Assuming that market interest rates increase 1 percent, the bond will have a value of $9,446 at the end of year

 LO.1