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Question 7 2 pts There are two discount bonds in the market both offering $1,518 next year. Bond A is issued by a good corporation
Question 7 2 pts There are two discount bonds in the market both offering $1,518 next year. Bond A is issued by a good corporation with good finances. If you had perfect information and knew about the health of this corporation, you would be willing to offer $1,380 for this bound. Bond B is issued by a high- risk corporation with shaky finances. If you had perfect information and knew about the health of this corporation, you would be willing to offer $1,265 for this bond. But, you don't have any information about the quality of these two companies. You think there is a 50-50 chance that either company could be good or bad. Because of this asymmetric information problem you are willing to charge an interest rate of X percent for the loan to either company. What is X? Use the rounding rules. Enter interest rate as a percentage (like 12.56 percent). The following table shows the initial balance sheet of a hypothetical bank. There are no reserves requirements (the required reserve ratio is zero). However, reserves cannot go below zero. The Fed wouldn't like that. The borrowings are either from the Fed or from other banks. Assets Reserves Securities Loans Total Liabilities & NW $20.00 Deposits $140.00 $20.00 Borrowings $30.00 $160.00 Bank Capital $30.00 $200.00 Total $200.00 Start from the initial balance sheet above. Suppose that the firm makes an after tax profit of $6. This results in the following rates of returns for this bank: Rate of Return on Assets= percent Rate of Return on Equity = percent
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