Reference no: EM133715721
Interest rate risk at Sixth Fourth
In this question, you will measure the interest risk exposure from a cash flow standpoint of a made-up bank-let's call it Sixth Fourth Bank-with the following balance sheet:
Assets Amount ($m) Maturity (yrs) Rate* (%)
Treasury notes 300 30/365 2.33
Treasury bonds 500 10 3.00
FRMs** 2,200 20 4.75
ARMs*** 1,000 20 4.00
Liabilities & equity
Deposits 3,000 1 0.75
Federal funds purchased 200 1/365 0.50
Equity 800
*This is an annual percentage interest rate.
**These FRMs are fixed-rate mortgages.
***These ARMs are adjustable-rate mortgages with rates that reset every six months.
Using this balance sheet, calculate Sixth Fourth's projected net interest income (NII)-which is interest income minus interest expense-for the next year. Assume that: (i) interest rates will not change over the next year; (ii) when an asset/liability matures it is replaced with an identical asset/liability.
Interest income: add up earnings across all assets over the next year;
Interest expense: total amount paid across all liabilities over the next year;
Projected NII: difference between these two sums.