If a bank invested $75 million in a two-year asset paying 12 percent interest per year and simultaneously issued a $75 million one-year liability paying 10 percent interest per year,what would be the net interest income in two years if,at the end of the first year,all interest rates increased by 1.5 percentage point?

Question

Quizplus · Accepted Answer

The bank earns $9 million in interest from the asset in the first year. In the second year, the liability is renewed at 11.5%, costing $8.625 million. The net interest income decreases by $1.875 million over two years.

If a Bank Invested $75 Million in a Two-Year Asset