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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?

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jepessoa

Answer:

7.5%

Explanation:

Currently Bank of the Atlantic is paying $4 million x 4% = $160,000 in interest expense, while it is receiving $300,000 in interest revenue.

if it wants to refinance its liabilities, its break even interest will be:

  • interest revenue must equal interest expense
  • $300,000 = $4,000,000 x rate
  • rate = $300,000 / $4,000,000 = 7.5%

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