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financial markets institutions

Questions and Answers of Financial Markets Institutions

24. A bank customer will be going to London in June to purchase $100,000 in new inventory. The current spot and futures exchange rates are as follows:The customer enters into a position in June
15. The financial statement on page 636 is for the cur- rent year. After you review the data, calculate the duration gap for the bank. Second National Bank Duration Duration Reserves Securities
14. The manager for Tyler Bank and Trust has the fol- lowing assets to manage:If the manager wants a duration gap of 3.00, what level of saving accounts should the bank raise? Assume that any
10. Chicago Avenue Bank has the following assets:What is Chicago Avenue Bank's asset portfolio duration? Asset T-bills Consumer loans Value $100,000,000 Duration (in years) 0.55 Commercial loans
9. The following financial Statement is for the cur, rent year. From the past, you know that or fixed•rate mortgages prepay each year. You also estimate that of checkable deposits and Oi savings
8. The limit order book for a security is as follows:The specialist receives the following, in order: Market order to sell 300 shares Limit order to buy 100 shares at 25.38 Limit order to buy 500
Il. On January 3. the prices at 4:00 P.M. are as follows:Calculate the new NAV. Stock Shares owned Price 1 1000 $1.92 2 5000 $51.18 3 2800 $29.08 4 9900 $67.19 5 3000 $4.51 Cash $5353.40
8. On January 2, the prices at 4:00 PM. are as follows:Calculate the net asset value (NAV) for the funcI Stock Shares owned Price 123410 1000 $2.03 5000 $51.37 2800 $29.08 10000 $67.19 5 3000 $4.42
6. On January 1, a mutual fund has the following assets and prices at 4:00 PM.Calculate the net asset value (NAV) for the fund. Assume that 8000 shares are outstanding for the fund. Stock Shares
1. On January 1, the shares and prices for a mutual fund at 4:00 PM. are as follows:Stock 3 announces record earnings, and the price of stock 3 jumps to $32.44 in after-market trading. If the fund
3. Consider a bank whth the following balance sheet:The bank commits to a loan agreement for S 10 [nib lion to a commercial customer. Calculate the bank's capital raüo belore after the agreement.
2. Consider a bank with the following balance sheet:Calculate the banks risk•weighted assets. Required Assets Reserves $8 million Excess T-bills Reserves $3 million $45 million Liabilities
3. You wish to hire Ricky to manage your Dallas oper- ations. The profits from the operations depend par- tially on how hard Ricky works, as follows.If Ricky is lazy, he will surf the Internet all
19. You are working with a pool of 1000 mortgages. Each mortgage is for $100,000 and has a stated annual interest rate (nominal) of 6.00 %. The mort- gages are all 30-year fixed rate and fully
10. Consider the following options available to a mort- gage borrower:What is the effective annual rate for each option? Interest Loan Amount Rate (%) Type of Discount Mortgage Points Option 1
14. Consider the following security information for four securities making up an indewWhat is the change in the value of the index from Time 0 to Time 1 if the index is calculated using a
3. The shares of Misheak, Inc., are expected to gen- erate the following possible returns over the next 12 months:If the stock is currently trading at $25 per share, what is the expected price in one
16. Your company owns the following bonds:If general interest rates rise from 8% to 8.5%, what is the approximate change in the value of the port- folio? Bond Market Value Duration ABC $13 million
5. Consider the following cash flows. All market inter- est rates are 12%.a, What price would you pay for these cash flows?What Lotal wealth do you expect after years if you sell the nghtS to the
3. Consider the two bonds described below:a. If both bonds had a required return of 8%, what would the bonds' prices be?b. Describe what it means if a bond sells at a dis- count, a premium, and at
12. In a Treasury auction of $2.5 billion par value 91- day T-bills, the following bids were submitted:If only these contpetitive bids are received, who will receive T-bills. in what quantity. and at
2. Estimates of unemployment for the upcoming year have been developed as follows:What is the expected unemployment rate? The standard deviation? Economy Bust Probability Unemployment Rate (%) 0.15
3. How does the after-tax yield on a municipal bond With a coupon rate Of paying interest annually, compare with that, of a corporate bond with a coupon rate or 10% paying interest annually? Assurne
2. Government economists have forecasted one-year T-bill rates for the following five years, as follows:You have a liquidity premium or 02596 for the next.two years and [hereafter. Would you be ing
7. If a yield curve looks like the one shown on the next page, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the mar
6. a yield Curve looks like the following one, What is the market predicting about the movement Of future short•term interest rates? What might the yield Curve indicate about the predictions about
1. You own a SIOOO-par zero-coupon bond that has five years of remaining maturity. You plan on sell-ing the bond in one year, and believe that the required yield next year will have the following
3. Consider a bond with a 7% annual coupon and a face value of 31000. Complete the following cable.What relationships do you observe between matu- rity and discount rate and the current price? Years
1. The following table lists foreign exchange rates between U.S. dollars and British pounds (GBP)during April.Which day would have been the best day to convert$200 into British pounds? Which day
2. We leave the details of pricing option contracts to another course. However, the following site can be used to demonstrate how the features of an option affect the option's prices. Go to
1. We have discussed various stock markets in detail throughout this text. Another market that is less well known is the New York Mercantile Exchange. Here contracts on a wide variety of commodities
30. North-Northwest Bank (NNWB) has a differential advantage in issuing variable-rate mortgages, but does not want the interest income risk associated with such loans. The bank currently has a
29. A swap agreement calls for Durbin Industries to pay interest annually based on a rate of 1.5% over the one-year T-bill rate, currently 6%. In return, Durbin receives interest at a rate of 6% on a
28. A trust manager for a $100,000,000 stock portfo- lio wants to minimize short-term downside risk using Dow put options. The options expire in 60 days, have a strike price of 9700, and a premium of
27. A banker commits to a two-year $5,000,000 com- mercial loan and expects to fulfill the agreement in 30 days. The interest rate will be determined at that time. Currently, rates are 7.5% for such
26. Consider a put contract on a T-bond with an exer- cise price of 101 12/32. The contract represents $100,000 of bond principal and has a premium of $750. The actual T-bond price is currently 100
25. Consider a put contract on a T-bond with an exer- cise price of 101 12/32. The contract represents $100,000 of bond principal and had a premium of $750. The actual T-bond price falls to 98 16/32
23. A bank issues a $100,000 fixed-rate 30-year mort- gage with a nominal annual rate of 4.5%. If the required rate drops to 4.0% immediately after the mortgage is issued, what is the impact on the
22. From the previous question, rates do indeed fall as expected, and the T-bond contract is priced at 103 5/32. If Springer closes its futures position, what is the gain or loss? How well does this
21. Springer County Bank has assets totaling $180 mil- lion with a duration of five years, and liabilities totaling $160 million with a duration of two years. Bank management expects interest rates
20. Assume the bank in the previous question partially hedges the mortgage by selling three 10-year T-note futures contracts at a price of 100 20/32. Each con- tract is for $1,000,000. After two
19. A bank issues a $3 million commercial mortgage with a nominal APR of 8%. The loan is fully amor- tized over ten years, requiring monthly payments. The bank plans on selling the loan after two
18. Chicago Bank and Trust has $100 million in assets and $83 million in liabilities. The duration of the assets is 5.9 years, and the duration of the liabilities is 1.8 years. How many futures
17. Futures are available on three-month T-bills with a contract size of $1 million. If you take a long posi- tion at 96.22 and later sell the contracts at 96.87, how much would the total net gain or
16. Laura, a bond portfolio manager, administers a $10 million portfolio. The portfolio currently has a dura- tion of 8.5 years. Laura wants to shorten the dura- tion to 6 years using T-bill futures.
15. A bank issues a $100,000 variable-rate 30-year mortgage with a nominal annual rate of 4.5%. If the required rate drops to 4.0% after the first six months, what is the impact on the interest
14. A hedger takes a short position in five T-bill futures contracts at the price of 98 5/32. Each contract is for $100,000 principal. When the position is closed, the price is 95 12/32. What is the
13. Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this
12. If your company has to make a 10 million euros pay- ment to a German company in June, three months from now, how would you hedge the foreign exchange risk in this payment with a 125,000 euros
11. If your company has a payment of 200 million euros due one year from now, how would you hedge the foreign exchange risk in this payment with 125,000 euros futures contracts?
10. If the savings and loan you manage has a gap of -$42 million, describe an interest-rate swap that would eliminate the S&L's income risk from changes in interest rates.
9. Explain why greater volatility or a longer term to maturity leads to a higher premium on both call and put options.
8. Suppose that you buy a call option on a $100,000 Treasury bond futures contract with an exercise price of 110 for a premium of $1500. If on expira- tion the futures contract has a price of 111,
7. If you buy a put option on a $100,000 Treasury bond futures contract with an exercise price of 95 and the price of the Treasury bond is 120 at expi- ration, is the contract in the money, out of
6. How would you use the options market to accom- plish the same thing as in Problem 5? What are the advantages and disadvantages of using an options contract rather than a futures contract?
5. Suppose that the pension you are managing is expecting an inflow of funds of $100 million next. year and you want to make sure that you will earn the current interest rate of 8% when you invest
3. If at the expiration date, the deliverable Treasury bond is selling for 101 but the Treasury bond futures contract is selling for 102, what will happen to the futures price? Explain your answer.
2. If the portfolio you manage is holding $25 million of 6s of 2023 Treasury bonds with a price of 110, what forward contract would you enter into to hedge the interest-rate risk on these bonds over
1. If the pension fund you manage expects to have an inflow of $120 million six months from now, what forward contract would you seek to enter into to lock in current interest rates?
2. If the finance company you manage has a gap of 5 million (rate-sensitive assets greater than rate- sensitive liabilities by $5 million), describe an inter- est-rate swap that would eliminate the
1. Why does a lower strike price imply that a call option will have a higher premium and a put option a lower premium?
2. The FDIC is extremely concerned with risk man- agement in banks. High-risk banks are more likely to fail and cost the FDIC money. The FDIC regu- larly examines banks and rates them using a sys-
1. This chapter discussed the need financial institu- tions have to control credit risk by lending to cred- itworthy borrowers. If you allow your credit to deteriorate, you may find yourself unable
29. Given the estimates of duration in Problem 27, how should the Friendly Finance Company alter the duration of its liabilities to immunize its net worth from interest-rate risk?
28. Given the estimates of duration found in Problem 27, how should the Friendly Finance Company alter the duration of its assets to immunize its net worth from interest-rate risk?
27. If the manager of the Friendly Finance Company revises the estimates of the duration of the com- pany's assets to two years and liabilities to four years, what is the effect on net worth if
26. Given the estimates of duration in Table 2, what will happen to the Friendly Finance Company's net worth if interest rates rise by 3 percentage points? Will the company stay in business? Why or
25. If the Friendly Finance Company raises an addi- tional $20 million with commercial paper and uses the funds to make $20 million of consumer loans that mature in less than one year, what happens
24. If the manager of the Friendly Finance Company decides to sell off $10 million of the company's con- sumer loans, half maturing within one year and half maturing in greater than two years, and
23. Given the estimates of duration in Problem 21, how should the bank alter the duration of its liabilities to immunize its net worth from interest-rate risk?
22. Given the estimates of duration in Problem 21, how should the bank alter the duration of its assets to immunize its net worth from interest-rate risk?
21. If the manager of the First National Bank revises the estimates of the duration of the bank's assets to four years and liabilities to two years, what is the effect on net worth if interest rates
20. Given the estimates of duration in Table 1, what will happen to the bank's net worth if interest rates rise by 10 percentage points? Will the bank stay in busi- ness? Why or why not?
19. If the manager of the First National Bank revises the estimate of the percentage of checkable deposits that are rate-sensitive from 10% to 25%, what will be the revised estimate of the interest-
18. If the manager of the First National Bank revises the estimate of the percentage of fixed-rate mort- gages that are repaid within a year from 20% to 10%, what will be the revised estimate of the
17. If the First National Bank decides to convert $5 mil- lion of its fixed-rate mortgages into variable-rate mortgages, what happens to its interest-rate risk? Explain with gap analysis.
16. If the First National Bank sells $10 million of its securities with maturities greater than two years and replaces them with securities maturing in less than one year, what is the income gap for
13. Springer County Bank has assets totaling $180 mil- lion with a duration of five years, and liabilities totaling $160 million with a duration of two years. If interest rates drop from 9% by 75
12. Calculate the change in the market value of assets and liabilities when the average duration of assets is 3.60, the average duration of liabilities 0.88, and interest rates increase from 5% to
11. A bank added a bond to its portfolio. The bond has a duration of 12.3 years and cost $1109. Just after buying the bond, the bank discovered that market interest rates are expected to rise from 8%
8. Calculate the income gap given the following items:SS in reserves S25 rnillion in variable-rate mortgages$4 million in checkable deposits$2 million in savings deposits milljon Of two-year CDs
7. Calculate the income gap for a financial institution with rate•sensitive assets Of $20 million and sensitive liabilities of million. If interest rates rise from to what is the expected change in
6. A banks balance sheet contains interest-sensitive assets of $280 million and interest-sensitive liabil•ities of $465 million. Calculate the income gap,
5. Calculate the duration 01 a commercial loam face value Of the Baan is It requirrs sim-ple interest yearly, with an APR of The loan is due in four years, The current market rate for such loans is
4. The value nt a $100,000 fixed-rate 30•year mort•gage falls to SS9,.337 when Interest rates move from to What is the approximate duration Of the mortgage?
3. Calculate the duration of a $IOO,OOO fixed-rate 30-year mortgage with a nominal annual rate of 7.0%.What is the expected percentage change in value if the required tate drops to 6.596 immediately
2. A hank issues a $100,000 fixed-rare 3D-year mort-gage with a nominal annual rate of 4,596. If the required rate drops to 4.0%, immediately after the mortgage is issued. what is the impact on the
1. A bank issues a $100,000 variable-rate SO.year mortgage Mth a nominal annual tate Of 4 If the required rate drops to after the first six months. what is the unpact on the interest Income for the
6. "Because diversification is a desirable strategy for avoiding risk, it never makes sense for a financial institution to specialize in making specific types of loans." Is this statement true,
5. A bank almost always insists that the firms it lends to keep compensating balances at the bank. Why?
4. Why is being nosy a desirable trait for a banker?
3. "If more customers want to borrow funds at the prevailing interest rate, a financial institution can increase its profits by raising interest rates on its loans." Is this statement true, false, or
2. Why are secured loans an important method of lending for financial institutions?
1. Can a financial institution keep borrowers from engaging in risky activities if there are no restric- tive covenants written into the loan agreement?
2. The Securities and Exchange Commission is responsible for regulating securities firms. Go to www.sec.gov. This is the official home page of the SEC. Use this page to answer the followinga. What is
1. Initial public offerings (IPOs) are when securities are sold to the public for the first time. Go to http:// ipohome.com. This site lists various statistics regarding the IPO market.a. What was
7. You want to buy 100 shares of a stock currently trading at $50 per share. Your brokerage firm allows margin sales with a 50% opening margin and a maintenance margin of 25%. What does this mean? If
6. For Blue Nile, Inc., what are the expected proceeds to the company? Is this certain? What assumptions are you making? How would you verify this?
5. To verify this further, examine the IPO for Blue Nile, Inc. It can be found on the SEC's site at http://www. sec.gov/Archives/edgar/data/1091171/00008916 1804001024/v97093b-4e424b4.htm. What was
4. Refer back to the IPO of eBay presented in the prob- lems for Chapter 11. What were the fees for eBay as a percent of funds raised? Does a pattern emerge?

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