Question

fernando bank has interest expense of $150 million, earning assets of $1,400 million and a nim of 5.00 percent. the bank also has interest-bearing liabilities of $1,100 million. fernando bank's spread is 1.65 percent. 1.10 percent. 1.94 percent. 2.08 percent.

Answer 1

The spread of Fernando Bank is calculated as the difference between the interest rate it earns on assets and pays on liabilities. However, the calculated spread of -8.636% does not match any of the provided options, which suggests a possible error in the provided information or question.

Step-by-step explanation:

The student's question involves calculating Fernando Bank's spread based on the given financial information. To find the spread, we first need to understand that a bank's spread is the difference between the interest rates it earns on loans and other assets and the interest rates it pays on deposits and other liabilities. With earning assets of $1,400 million and a net interest margin (NIM) of 5.00%, the bank's interest income can be calculated. Similarly, given the interest-bearing liabilities of $1,100 million and the interest expense of $150 million, the cost of funds can be calculated.

Here is how the spread is calculated:

• First, we calculate the average interest rate earned on assets:

NIM = (Interest income / Earning assets) * 100

• Using the reverse calculation, Interest income = (NIM/100) * Earning assets
• Interest income = (5.00/100) * $1,400 million = $70 million
• Next, we calculate the average interest rate paid on liabilities:

Interest expense = (Interest expense / Interest-bearing liabilities) * 100

• Average interest rate paid on liabilities = (Interest expense / Interest-bearing liabilities) = ($150 million / $1,100 million) * 100 = 13.636%
• Finally, to get the spread, subtract the average interest rate paid on liabilities from the interest earned on assets:
• Spread = Interest earned on assets - Average interest rate paid on liabilities
• Spread = 5.00% - 13.636% = -8.636% (which indicates an issue as typically a bank would expect a positive spread)

Considering the options given, there seems to be a discrepancy because none of the provided options match the calculated spread of -8.636%. If the spread provided in the question was meant to be positive, there could be an error either in the information provided or the question itself may contain some inaccuracies that need clarification.

Answer 2

Fernando Bank's spread is -5.71%.

Spread = Net Interest Income / Earning Assets We will use this to calculate Fernando Bank's spread.

The Net Interest Income (NII) is:

= Interest Income - Interest Expense

= $1,400 million * 5% - $150 million

= $70 million - $150 million

= -$80 million

Spread = NII / Earning Assets

Spread = (-$80 million) / $1,400 million

Spread = -0.0571

Spread = -5.71%.

Full question:

Fernando Bank has interest expense of $150 million, earning assets of $1,400 million and a NIM of 5 %. The bank also has interest bearing liabilities of $1,100 million. Fernando Bank’s spread is: