Consider the following balance sheet for Watchovia Bank

(in millions): (LG 23-1)

Assets Liabilities and Equity Floating-rate mortgages (currently 10% annually) $ 50 1-year time deposits (currently 6% annually) $ 70 30-year fixed-rate loans (currently 7% annually) 50 3-year time deposits (currently 7% annually) 20 Equity 10 Total ____ Total ____ assets $100 liabilities and equity $100

a. What is Watchovia’s expected net interest income at year-end?

b. What will net interest income be at year-end if interest rates rise by 2 percent?

c. Using the one-year cumulative repricing gap model, what is the expected net interest income for a 2 percent increase in interest rates?

d. What will net interest income be at year-end if interest rates on RSAs increase by 2 percent but interest rates on RSLs increase by 1 percent? Is it reasonable for changes in interest rates on RSAs and RSLs to differ? Why?

AppendixLO1