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SBSC bank currently pays 2.0% p.a. on 12-month term deposits and expects to be able to attract similar funds in 12 months time at a

SBSC bank currently pays 2.0% p.a. on 12-month term deposits and expects to be able to attract similar funds in 12 months time at a cost of 2.5%. Accordingly, it has priced a fixed two-year loan of $450,000 at 1.5% over the expected cost of funds with interest paid annually. The day following the issue of the loan, the yield on both one- year and two-year maturity government bonds (indicators of market rates) increased by 0.5% p.a.

(i)Ignoring all other assets and liabilities calculate the present value of the expected interest margin.

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