4. Consider the following balance sheet for Watchovia Bank (in millions): (LG 23-1) Assets Liabilities and...

Transcribed Image Text:

4. Consider the following balance sheet for Watchovia Bank (in millions): (LG 23-1) Assets Liabilities and Equity Floating-rate 1-year time mortgages (currently deposits (currently 10% annually) $ 50 6% annually) $ 70 30-year fixed-rate 3-year time loans (currently deposits (currently 7% annually) 50 7% annually) 20 Equity 10 220 Total Total assets $100 liabilities and equity $100 a. What is Watchovia's expected net interest income at year-end? b. What will net interest income be at year-end if interest rates rise by 2 percent? c. Using the one-year cumulative repricing gap model, what is the expected net interest income for a 2 percent increase in interest rates? d. What will net interest income be at year-end if interest rates on RSAS increase by 2 percent but interest rates on RSLS increase by 1 percent? Is it reasonable for changes in interest rates on RSAS and RSLs to differ? Why? 4. Consider the following balance sheet for Watchovia Bank (in millions): (LG 23-1) Assets Liabilities and Equity Floating-rate 1-year time mortgages (currently deposits (currently 10% annually) $ 50 6% annually) $ 70 30-year fixed-rate 3-year time loans (currently deposits (currently 7% annually) 50 7% annually) 20 Equity 10 220 Total Total assets $100 liabilities and equity $100 a. What is Watchovia's expected net interest income at year-end? b. What will net interest income be at year-end if interest rates rise by 2 percent? c. Using the one-year cumulative repricing gap model, what is the expected net interest income for a 2 percent increase in interest rates? d. What will net interest income be at year-end if interest rates on RSAS increase by 2 percent but interest rates on RSLS increase by 1 percent? Is it reasonable for changes in interest rates on RSAS and RSLs to differ? Why?