Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually.It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually.What is the maximum interest rate that it can refinance its $4 million liability and still break even on its net interest income in dollars?

Question

Quizplus · Accepted Answer

To break even on net interest income, the bank's interest income must be equal to its interest expense. 
Interest income= 5,000,000 x 0.06 = $300,000
Interest expense= 4,000,000 x r, where r is the new interest rate
Thus, 300,000 = 4,000,000 x r
r= 0.075 or 7.5%
Therefore, the maximum interest rate that the bank can refinance its $4 million liability and still break even on its net interest income in dollars is 7.5 percent.

Bank of the Atlantic Has Liabilities of $4 Million with an Average