Sun Bank USA has purchased a 16 million one-year euro loan that pays 12 percent interest annually. The spot rate of U.S. dollars per euro is 1.40. Sun Bank has funded this loan by accepting a British pound- denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of U.S. dollars per British pound is 1.60.

a. What is the net interest income earned in dollars on this one-year transac- tion if the spot rates of U.S. dollars per euro and U.S. dollars per British pound at the end of the year are 1.70 and 1.85?

b. What should be the spot rate of U.S. dollars per British pound at the end of the year in order for the bank to earn a net interest margin of 4 percent?

c. Does your answer to part

(b) imply that the dollar should appreciate or depreciate against the pound?

d. What is the total effect on net interest income and principal of this transac- tion given the end-of-year spot rates in part (a)? LO.1