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Arvest Bank is doing some scenario analysis. It believes the prime interest rate for business loans will change from their current 4 percent to
Arvest Bank is doing some scenario analysis. It believes the prime interest rate for business loans will change from their current 4 percent to either 5 percent or 3 percent in the next year. There will be no change in their $3,000,000 income at the 4 percent interest level, but net income will fall to $1,000,000 if interest rates fall to 3 percent and increase to $4,000,000 if the interest rates increase to 5 percent. Finally, Arvest predicts a 25 percent probability of a 4 percent interest rate, 25 percent probability of a 3 percent interest rate and a 50 percent probability of a 5 percent interest rate. Required: What is the expected financial impact on net income of changing interest rates at Arvest Bank? Amount Changing Expected financial impact Arvest Bank is doing some scenario analysis. It believes the prime interest rate for business loans will change from their current 4 percent to either 5 percent or 3 percent in the next year. There will be no change in their $3,000,000 income at the 4 percent interest level, but net income will fall to $1,000,000 if interest rates fall to 3 percent and increase to $4,000,000 if the interest rates increase to 5 percent. Finally, Arvest predicts a 25 percent probability of a 4 percent interest rate, 25 percent probability of a 3 percent interest rate and a 50 percent probability of a 5 percent interest rate. Required: What is the expected financial impact on net income of changing interest rates at Arvest Bank? Amount Changing Expected financial impact
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