If a bank invested $75 million in a two-year asset paying 12 percent interest per year and simultaneously issued a $75 million one-year liability paying 10 percent interest per year, what would be the net interest income in two years if, at the end of the first year, all interest rates increased by 1.5 percentage point?

To solve this problem, we first need to break it into two parts: what happens in the first year and what happens in the second year.

First Year: - The assets earn 12% interest on $75 million. - The liabilities cost 10% interest on $75 million.

Interest earned on assets in the first year = $75 million * 0.12 = $9 million Interest paid on liabilities in the first year = $75 million * 0.10 = $7.5 million

Net interest income in the first year = Interest earned - Interest paid = $9 million - $7.5 million = $1.5 million

Now, at the end of the first year, interest rates increase by 1.5 percentage points. This means that, assuming the bank reinvests or rolls over the liability:

New interest rate for assets = 12% + 1.5% = 13.5% New interest rate for liabilities = 10% + 1.5% = 11.5%

Second Year: - The assets now earn 13.5% interest. - The bank issues a new one-year liability or rolls over the existing one at 11.5% interest.

Interest earned on assets in the second year = $75 million * 0.135 = $10.125 million Interest paid on liabilities in the second year = $75 million * 0.115 = $8.625 million

Net interest income in the second year = Interest earned - Interest paid = $10.125 million - $8.625 million = $1.5 million

Now, let's sum up the net interest income over the two years:

Net interest income over two years = Net income first year + Net income second year Net interest income over two years = $1.5 million + $1.5 million = $3 million

So the net interest income in two years from these transactions would be $3 million.