Millon National Bank has 10 million British pounds (£) in one-year assets and £8 million in one-year liabilities.In addition, it has one-year liabilities of 4 million euros (€).Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent.All interest and principal will be paid at the end of the year.What is the net interest income in dollars if the spot prices at the end of the year are $1.35/£ and €1.35/$ and the liabilities instead cost 7 percent instead of 8 percent?

Question

Quizplus · Accepted Answer

First, calculate the interest income and interest expenses in their respective currencies and then convert them to dollars.Interest income from assets:- Assets = £10 million- Interest rate = 8%- Interest income = £10 million * 8% = £0.8 millionInterest expense on £ liabilities:- Liabilities = £8 million- Interest rate = 7% (revised rate)- Interest expense = £8 million * 7% = £0.56 millionInterest expense on € liabilities:- Liabilities = €4 million- Interest rate = 7%- Interest expense = €4 million * 7% = €0.28 millionConvert interest income and expenses to dollars:- £ to $ conversion rate = $1.35/£- € to $ conversion rate = €1.35/$, which is equivalent to $1/€1.35Interest income in dollars:- £0.8 million * $1.35/£ = $1.08 millionInterest expense in dollars for £ liabilities:- £0.56 million * $1.35/£ = $0.756 millionInterest expense in dollars for € liabilities:- €0.28 million * $1/€1.35 = $0.207407 million (approximately)Net interest income in dollars:- $1.08 million - ($0.756 million + $0.207407 million) = $1.08 million - $0.963407 million = $116,592.93 (approximately)Therefore, the correct answer is B) $116,592.59, with a slight rounding difference in the final calculation.

Millon National Bank Has 10 Million British Pounds (£) in One-Year