Goodfellows National Bank has decided to compete with savings and loan associations (S&Ls) by offering 30-year...

 

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Goodfellows National Bank has decided to compete with savings and loan associations (S&Ls) by offering 30-year fixed-rate mortgage loans at 8 percent annual interest. It plans to obtain the money for the loans by selling one-year 6 percent CDs to its depositors. During the first year of operation, Goodfellows sells its depositors $1,000,000 worth of 7 percent one-year CDs, and homebuyers take out $1,000,000 worth of 8 percent 30-year fixed-rate mortgages. a. Considering only the information above, what is Goodfellows' gross profit for the first year of operation? In Goodfellows' second year of operation, Goodfellows must sell $1,000,000 worth of new CDs to replace the ones that mature. However, interest rates have gone up during the year, and now the rate the bank must pay to get people to buy new CDs is 9 percent. b. Assuming that Goodfellows does sell $1,000,000 worth of new CDs at 9 percent interest in the second year, and assuming the $1,000,000 worth of 8 percent mortgage loans are still outstanding, what is Goodfellows' gross profit during the second year? (Note: For the purposes of this problem, assume that the mortgage holders make only interest payments each year.) Goodfellows National Bank has decided to compete with savings and loan associations (S&Ls) by offering 30-year fixed-rate mortgage loans at 8 percent annual interest. It plans to obtain the money for the loans by selling one-year 6 percent CDs to its depositors. During the first year of operation, Goodfellows sells its depositors $1,000,000 worth of 7 percent one-year CDs, and homebuyers take out $1,000,000 worth of 8 percent 30-year fixed-rate mortgages. a. Considering only the information above, what is Goodfellows' gross profit for the first year of operation? In Goodfellows' second year of operation, Goodfellows must sell $1,000,000 worth of new CDs to replace the ones that mature. However, interest rates have gone up during the year, and now the rate the bank must pay to get people to buy new CDs is 9 percent. b. Assuming that Goodfellows does sell $1,000,000 worth of new CDs at 9 percent interest in the second year, and assuming the $1,000,000 worth of 8 percent mortgage loans are still outstanding, what is Goodfellows' gross profit during the second year? (Note: For the purposes of this problem, assume that the mortgage holders make only interest payments each year.)