A bank has $150 million in 1-year loans earning a fixed rate equal to 4.75%. The assets are funded by $150 million in liabilities that have a cost of 4.25% and a maturity of 3 years. If all interest rates are projected to fall 100 basis points by next year, by how much will the bank's profits and loan NIM change in year two? Does this bank face refinancing risk or reinvestment risk? Explain.

Question

Quizplus · Accepted Answer

The Answer of A bank has $150 million in 1-year loans earning a fixed rate equal to 4.75%. The assets are funded by $150 million in liabilities that have a cost of 4.25% and a maturity of 3 years. If all interest rates are projected to fall 100 basis points by next year, by how much will the bank's profits and loan NIM change in year two? Does this bank face refinancing risk or reinvestment risk? Explain.

A Bank Has $150 Million in 1-Year Loans Earning a Fixed