Question: REFINANCING RISK. FOR THIS AND THE NEXT TWO QUESTIONS. A financial institution can borrow $100 million for 1 year at 3%. It plans to invest

REFINANCING RISK. FOR THIS AND THE NEXT TWO QUESTIONS.

A financial institution can borrow $100 million for 1 year at 3%. It plans to invest the amount in a 2-year facility which is expected to earn 4.5% per year. Calculate net interest income for the first year. Hint: Watch video for analysis.

Suppose, the 1-year loan can be refinanced at 3.75% in the second year. Calculate the cumulative net interest income for both years.

Calculate the breakeven borrowing rate for the second year. That is, what borrowing interest rate in the second year will cause the cumulative net interest income to equal zero?

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