Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(3 points) 2. A bank has the following balance sheet. The loans have a 3-year maturity and earn 7.9% annually. The interest is paid

image text in transcribed

(3 points) 2. A bank has the following balance sheet. The loans have a 3-year maturity and earn 7.9% annually. The interest is paid once a year and the principal will not be repaid until maturity. The securities do not earn interest. The certificates of deposit (CDs) have a 1-year maturity. The bank must pay 5.4% on the CDs. Cash Loans Securities Total Assets Assets Liabilities & Equity $480,000 Demand deposits $750,000 2,960,000 Certificates of deposit 2,960,000 1,300,000 $4,740,000 Equity 1,030,000 Total Liabilities & Equity $4,740,000 a. What is the net interest income (NII) for the bank at the end of the first year? (4 points) b. Suppose that interest rates are expected to increase by 50 basis points (0.5%) at the end of the first year. What will the NII be at the end of the second year? (4 points) C. If interest rates change as expected, the value of the bank's loans will decrease in value to $2,933,752. What will happen to the market value of the bank's equity? Why? (3 points)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Investing

Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk

12th edition

978-0133075403, 133075354, 9780133423938, 133075400, 013342393X, 978-0133075359

More Books

Students also viewed these Finance questions