Problem 5:

If Super Corp. has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 18 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 38 percent of interest and principal will be collected. What is the concentration limit as a % of capital for secured loans made by this bank? Briefly discuss the importance of the concentration ratio.

Problem 6:

Given maturities of 1,2- and 20-year bonds with respective yields of 4, 5 and 11 percent. These bonds have rated yields at 7, 9, and 16 percent. What is the implied probability of repayment on one-year B-rated debt? What is B-rated debt bonds and implied probability represent here? Show work and discuss the importance of implied probability.

Problem 7:

A financial institution is charging a 13 percent interest rate on a $15,000,000 loan. The bank also charged $150,000 in fees to originate the loan. The bank has a cost of funds of 9 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest. What is the risk of the loan using the Moody's Analytics model? Briefly discuss the importance of this model.

Problem 8:

A hedge fund is holding a three-year, $10 million face value 6 percent annual coupon bond selling at par.

1. What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?
2. What is the impact of a 75-basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven-year, $100 million face value 7 percent annual bond outstanding?
3. In addition to interest rate risks what is one other risk associated with this type of bond and why?