First National Bank is doing some scenario analysis. It believes that its source of funds (the Federal Reserve) will soon increase the cost of loans. In fact, the cost of making loans is expected to change from the current 2 percent interest to either 3 percent or 4 percent interest in the next year. There will be no change in its $2,000,000 income at the 2 percent interest level, but net income will fall to $1,000,000 if interest rates increase to 3 percent and decrease to $100,000 if the interest rates increase to 4 percent . Finally, National predicts a 10 percent probability of a decrease to 2 percent interest rate, a 50 percent probability of a 3 percent interest rate, and a 40 percent probability of an increase to 4 percent interest rate.
First National Bank is doing some scenario analysis. It believes that its source of funds (the Federal Reserve) will soon increase the cost of loans. In fact, the cost of making loans is expected to change from the current 2 percent interest to either 3 percent or 4 percent interest in the next year. There will be no change in its $2,000,000 income at the 2 percent interest level, but net income will fall to $1,000,000 if interest rates increase to 3 percent and decrease to $100,000 if the interest rates increase to 4 percent . Finally, National predicts a 10 percent probability of a decrease to 2 percent interest rate, a 50 percent probability of a 3 percent interest rate, and a 40 percent probability of an increase to 4 percent interest rate.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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First National Bank is doing some scenario analysis. It believes that its source of funds (the Federal Reserve) will soon increase the cost of loans. In fact, the cost of making loans is expected to change from the current 2 percent interest to either 3 percent or 4 percent interest in the next year. There will be no change in its $2,000,000 income at the 2 percent interest level, but net income will fall to $1,000,000 if interest rates increase to 3 percent and decrease to $100,000 if the interest rates increase to 4 percent . Finally, National predicts a 10 percent probability of a decrease to 2 percent interest rate, a 50 percent probability of a 3 percent interest rate, and a 40 percent probability of an increase to 4 percent interest rate.
Transcribed Image Text:First National Bank is doing some scenario analysis. It believes that its source of funds (the Federal Reserve) will soon increase the
cost of loans. In fact, the cost of making loans is expected to change from the current 2 percent interest to either 3 percent or 4
percent interest in the next year. There will be no change in its $2,000,000 income at the 2 percent interest level, but net income will
fall to $1,000,000 if interest rates increase to 3 percent and decrease to $100,000 if the interest rates increase to 4 percent. Finally,
National predicts a 10 percent probability of a decrease to 2 percent interest rate, a 50 percent probability of a 3 percent interest rate,
and a 40 percent probability of an increase to 4 percent interest rate.
Required:
What is the expected financial impact of changing interest rates at First National Bank? (Enter all values as positive value.)
Expected financial impact
Amount
Changing
decrease
increase
decrease
no change
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