What will be the effect on net interest income

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A DI has assets of $10 million consisting of $1 million in cash and $9 million in loans. The DI has core deposits of $6 million, subordinated debt of $2 million and equity of $2 million. Increases in interest rates are expected to cause a net drain of $2 million in core deposits over the year.

Question (a) The average cost of deposits is 6 per cent and the average yield on loans is 8 per cent. The DI decides to reduce its loan portfolio to offset this expected decline in deposits. What will be the effect on net interest income and the size of the DI after the implementation of this strategy?

Reference no: EM132566278

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