Exercise 13 ( Chapter 19) Assume ABC bank has $ 95 million in one year loans earning at fixed rate equal to 3.25%. The assets are funded by $ 80 million in liabilities that have a cost of 3% and a maturity of three years. Assume all interest rates fall by 100 basis points by next year. a) Compute NIM for ABC bank for first year NIM = (Interest earned on loans - Interest paid on liabilities)/ Interest Earnings Assets 3.25% x 95,000,000 - 3% x 80,000,000/ 95,000,000 =3,0875,500 - 2,400,000/ 95,000,000 = 0.29%x 100 29% b) Compute NIM for ABC Bank for second year after interest rate fall. NIM = (Interest earned on loans - Interest paid on liabilities)/ Interest Earnings Assets 2.25% x 95,000,000 - 3% x 80,000,000/ 95,000,000 x 100 = c) Does the bank face re-investment risk or re-financing risk? Explain. Bank faces re-investment risk. Reason: If a financial institution's assets are shorter-term than its liabilities, it faces reinvestment risk