A bank has a $500 million portfolio of 10-year fixed rate loans, with an interest rate of 5%. The bank has funded the loans with a mix of deposits and bonds. The deposits have a 1-year maturity and pay interest at a rate of 1.5%. The bonds have a 5-year maturity and pay interest at a rate of 4%. The bank's goal is to earn a net interest income of $25 million in the first year.

a) What is the expected cash inflow and outflow for the first year for the bank from the assets and liabilities? b) What is the gap in the first year? c) What is the net interest income for the first year if the interest rates for the deposits and bonds remain constant? d) What is the new net interest income if the interest rates for the deposits and bonds both decrease by 50 basis points?

(You may assume that the loan payments and interest payments occur at the end of each year.)

This question is worth 20 marks.

Answer rating: 100% (QA)

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