## Question

# 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 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.

## Step by Step Solution

3.43 Ratings (108 Votes)

There are 3 Steps involved in it

### Step: 1

The detailed answer for the above question is provided below a Expected cash inflow from the loans 5...### Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

### Step: 2

### Step: 3

## Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started