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) --

Bank of America

(BAC) - Get Free Report

indicated just how much its bottom line could be affected by rising interest rates this year.

In an annual 10-K report filed on Friday, Bank of America said it is positioned to earn $600 million worth of net interest income for each 1/10th of a percentage point that rates rise in 2010, if both short- and long-term rates climb at the same pace. Net interest income is a key benchmark of bank profitability, because it measures the different between the cost of capital used to make loans, and the income received from loans.

Bank of America's rate bets are positioned for rates to remain low over the next three months, but rise toward the end of the year. If short-term rates remain stable, Bank of America will earn $476 million for each 1/10th of a percentage point that long-term rates rise. It could also earn another $127 million for each 1/10th of a point that short-term rates decline.

Rates have been volatile of late, as the market assesses the impact of the

Federal Reserve's

tightening monetary policy.

Last week, the Fed decided to boost the discount rate -- which banks pay for emergency loans -- by a quarter-point to 0.75%. The move stirred fears that the Fed may lift its key interest-rate target sooner than expected. It now stands at 0% to 0.25%, a historically low level. But Fed Chairman Ben Bernanke tamped down such speculation this week by reiterating his intent to keep rates low during Congressional hearings. Other key policy setters like San Francisco Fed President Janet Yellen have backed up that view.

The market does indeed expect rates to rise this year, it's just a matter of when. The yield curve has been widening lately, with long-term rates spiking faster than short-term rates, setting up a profitable situation for Bank of America's rate strategy.

Economists at Barclays Capital recently forecast a relatively stable outlook for short-term rates through the first half of the year, with long-term rates pricing in an interest-rate rise through the second quarter. According to their analysis, by year-end, the Fed funds rate will have climbed to 1% from the current level, 3-month Libor rates will have climbed 0.9 points, and 10-year Treasury bonds will be priced 0.65 points higher.

Those predictions compare with 3-month Libor rates that stood at 0.25% and 10-year Treasury yields of 3.85% at year-end.

If correct, the forecasts represent hundreds of millions of dollars' worth of additional interest income for Bank of America with each incremental uptick in rates. Of course if they're incorrect, and rates fall or short-term rates rise faster and harder than long-term rates, Bank of America could lose a lot too.

The bank says it expects to lose $1.08 billion for each 1/100th of a point that short- and long-term rates drop together. It predicts losing $616 million for each 1/100th of a point that long-term rates fall while short-term rates remain stable, and $444 million for each 1/100th of a point that short-term rates fall while long-term rates remain stable.

Wells Fargo

(WFC) - Get Free Report

has set up a

similarly bullish interest-rate strategy, using rate swaps and securities from

Fannie Mae



Freddie Mac


, to offset rate changes that may affect its enormous mortgage-servicing rights portfolio. Such economic hedges accounted for hedges accounted for $6.8 billion, or 38%, of Wells Fargo's pre-tax earnings for all of 2009.

-- Written by Lauren Tara LaCapra in New York