Question

1. Below are two different financial situations, find the answers and show your calculations: A. Star Bank has an interest expense of $200 million and interest income of $400 million. Star Bank has interest-bearing liabilities of $1,600 million and earning assets of $2,600 million. What is the spread of Star Bank? Show your calculations. B! An investor starts with $1 million and converts it to 0.75 million pounds, which is then invested for one year. In a year the investor has 0.7795 million pounds, which she then converts to dollars at an exchange rate of 0.72 pounds per dollar. Calculate the U.S. dollar annual rate of return the investor earns. Show your calculations.

Answer 1

Interest expense	200
Interest bearing liabilities	1600
Interest cost rate = (interest expense / Interest bearing liabilities)	=200/1600
Interest cost rate	12.50%
Interest income	400
Interest earning assets	2600
Interest income rate = (interest income / Interest earning assets)	=400/2600
Interest income rate	15.38%
Spread = Interest income rate - Interest expense rate
Spread = 15.38% - 12.50%
Spread = 2.88%

The spread between the lending rate and borrowing rate for bank is 2.88%