Question 2 Rosy Bank is a well diversified bank that lends to both consumers, and small and large corporations In the past week its credit department received a number of loan applications from different companies The loan officer is ready to approve 25 applications with a total volume of $125 million Each loan is $5 million All loans have equal risk and an interest rate of 4 All loans have a 5 year maturity Before sending the final approval to each company, you are asked to find an appropriate funding method Your team in the liability management department has computed the marginal and total profit for each option Note that the amount listed is the exact amount to be raised using this funding option Funding option Amount ($ million) Interest rate Marg Profit Total Profit 5 year CD 75 2 60 1 4 $1 05 million 3 year bond 125 2 80 0 9 $1 50 million Discuss your preferred funding option and motivate your choice Note you need to choose 1 option at this point (5 marks) After years of steady growth and maintaining a rather conservative risk profile the bank has recently been sold to a large institutional investor The institutional investor, BigCapital LLC, aims to achieve an 18 ROE at Rosy Bank We obtain the following additional information Operating costs $100 million Earning assets $2,500 million Tax rate 35 Equity $300 million Using your selected funding option under a , which interest rate does Rosy Bank charge on the new loans, keeping in mind the 18 ROE target You dont need to take into account the yield on existing assets Assume now that the cost of liabilities, the yield on assets, profit margin, and asset yield is fixed Which other actions might Rosy Bank take to achieve the 18 target ROE List two actions and motivate briefly

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Question 2 Rosy Bank is a well-diversified bank that lends to both consumers, and small and large corporations. In the past week its credit department

Question 2

Rosy Bank is a well-diversified bank that lends to both consumers, and small and large corporations. In the past week its credit department received a number of loan applications from different companies. The loan officer is ready to approve 25 applications with a total volume of $125 million. Each loan is $5 million. All loans have equal risk and an interest rate of 4%. All loans have a 5 year maturity.

Before sending the final approval to each company, you are asked to find an appropriate funding method. Your team in the liability management department has computed the marginal and total profit for each option. Note that the amount listed is the exact amount to be raised using this funding option.

Funding option	Amount ($ million)	Interest rate	Marg. Profit	Total Profit
5-year CD	75	2.60%	1.4%	$1.05 million
3-year bond	125	2.80%	0.9%	$1.50 million

Discuss your preferred funding option and motivate your choice. Note: you need to choose 1 option at this point. (5 marks)

After years of steady growth and maintaining a rather conservative risk profile the bank has recently been sold to a large institutional investor. The institutional investor, BigCapital LLC, aims to achieve an 18% ROE at Rosy Bank. We obtain the following additional information:

Operating costs	$100 million
Earning assets	$2,500 million
Tax rate	35%
Equity	$300 million

Using your selected funding option under a., which interest rate does Rosy Bank charge on the new loans, keeping in mind the 18% ROE target? You dont need to take into account the yield on existing assets.
Assume now that the cost of liabilities, the yield on assets, profit margin, and asset yield is fixed. Which other actions might Rosy Bank take to achieve the 18% target ROE? List two actions and motivate briefly.