Corporate Finance
1a)
Financial Institution (FI) Balance Sheet (Amount in millions, Duration in years) | |||||
Assets | Amount | Duration | Liabilities | Amount | Duration |
Cash | 50 | ? | Core Deposits | 750 | 1.25 yrs |
Treasury Bonds | 350 | 1.95 yrs | CDs | 300 | 1.00 yrs |
Loans (special) | 650 | ? | Euro CDs | ? | 0.75 yrs |
Loans (fixed) | 450 | 3.25 yrs | Equity | 150 | |
The bank has granted a special loan that has 3 years to maturity and has repayments of $357.875 million at the end of year 1, no payment at the end of year 2 and $357.875 payments at the end of year 3. The loan is trading at par and the yield to maturity is 5 percent per annum.
Assuming a flat yield curve and a parallel shift of the entire yield curve of 50-basis points upward what is the impact on the FI’s market value of equity?
1b)
Calculate the convexity for a three-year 5% coupon rate with a face value of $500,000 loan. What is the convexity of the same loan but with amortised payments?
Use this information to determine the impact on the market value of the bond loan and the amortised loan if the entire yield curve shifted downward 50-basis points.
What is the usefulness of convexity when duration is available as a measure of interest rate risk? What is the practical implication for the three-year loan in this example?
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Show work (40 Points) As the new management trainee at the Rossville Bank of Tennessee, you...
Show
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(40 Points) As the new management trainee at the Rossville Bank of Tennessee, you are given balance sheet, you have been asked by the bank president to determine the current mark-to-market balance sheet and modified durations for the bank's assets and liabilities. Fill in the blanks with market values and modified durations. Some of this information is already filled in. The bank has only three types of assets and two types of deposits. Amounts are in S thousands...
24. The balance sheet for Gotbucks Bank Inc. (GBI) is presented below ($ millions). $ 30...
24. The balance sheet for Gotbucks Bank Inc. (GBI) is presented below ($ millions). $ 30 $ 20 50 Assets Cash Federal funds Loans (floating) Loans (fixed) Total assets Liabilities and Equity Core deposits Federal funds Euro CDs Equity Total liabilities and equity 105 130 20 65 $220 $220 Notes to the balance sheet: The fed funds rate is 8.5 percent, the floating loan rate is LIBOR (London Interbank Offered Rate) + 4 percent, and currently LIBOR is 11 percent....
Q1) Two banks are being examined by regulators to determine the interest rate sensitivity of their...
Q1) Two banks are being examined by regulators to determine the interest rate sensitivity of their balance sheets. Bank A has assets composed solely of a 10-year $1 million loan with a coupon rate and yield of 12 percent. The loan is financed with a 10-year $1 million CD with a coupon rate and yield of 10 percent. Bank B has assets composed solely of a 7-year, 12 percent zero-coupon bond with a current (market) value of $894,006.20 $1,976,362.88. The...
22-4 Use the data provided for Gotbucks Bank, Inc., to answer this question. Gotbucks Bank, Inc....
22-4 Use the data provided for Gotbucks Bank, Inc., to answer this question. Gotbucks Bank, Inc. (in $ millions) Assets Liabilities and Equity Cash $ 35 Core deposits $ 36 Federal funds 25 Federal funds 55 Loans (floating) 110 Euro CDs 135 Loans (fixed) 70 Equity 14 Total assets $ 240 Total liabilities and equity $ 240 Notes to the balance sheet: Currently, the fed funds rate is 9 percent. Variable-rate loans are priced at 3 percent over LIBOR (currently...
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4.4.
Gotbucks Bank, Inc. (in $millions) Assets Liabilities and Equity $ 41 Core deposits Cash Federal funds Loans (floating) 31 Federal funds 61 116 Euro CDs Loans (fixed) 76 Equity 17 Total assets S 264 Total liabilities and equity S 264 Notes to the balance sheet: Currently, the fed funds rate is 9.6 percent. Variable-rate loans are priced at 2 percent over LIBOR (currently at 10 percent). Fixed-rate loans are selling at par and have five-year maturities with 11 percent...
9. A financial institution is considering a customer’s request for a 12-year $15 million loan, with annual interest paym...
9. A financial institution is considering a customer’s request for a 12-year $15 million loan, with annual interest payments and the principal due at maturity. The financial institution requires a 22.5% risk adjusted return on capital for this loan. Its cost of funds is 3.875% for this loan and it will charge a 2% risk premium. Historically, the worst 1% of comparable loans experience a 125 basis point increase in the credit risk premium. The financial institution’s typical origination fee...
finance
1. TVM and bond valuation questions (1 mark each, give answers to 2 decimal places):Your case company has an issue of $1,000 par value semi-annual coupon bonds with 7 years remaining until maturity. The annual coupon rate and yield to maturity for these bonds are given in the spreadsheet. What is the price of the bonds?Your case company is considering a contract in which its customer will make end-of-month payments of the amount shown in the data spreadsheet (see instructions...
Below is some useful material. A portfolio manager wants to estimate the interest rate risk of...
Below is some useful material.
A portfolio manager wants to estimate the interest rate risk of a bond using duration. The current price of the bond is 82. A valuation model found that if interest rates decline 30 basis points, the price will increase to 83.50 and if interest rates increase by 30 basis points, the price will decline to 80.75. What is the duration of this bond? [Read Attachment #1 before attempting.) Macaulay, Modified and Approximate Modified Durations Macaulay...
Use the following information to answer questions #3, #4, and #5 A bank is planning to...
Use the following information to answer questions #3, #4, and #5 A bank is planning to make a loan of $5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5 years. The return on equity (ROE) for the bank is 10 percent. The bank has estimated the maximum change in the risk premium on the steel manufacturing sector...
2. Use the following information to conduct a duration gap analysis. Assets Amount Rate Duration Cash...
2. Use the following information to conduct a duration gap analysis. Assets Amount Rate Duration Cash $ 23,000 0% Bonds $102,000 7.2% 1.8 years Loans $375,000 11.0% 1.5 years Liabilities and Equity Small time deposits $130,000 3.6% 4 years Large CDs $ 70,000 6.3% | 1 year Interest checking $250,000 2.8% 3.3 years Equity $50,000 Calculate the leverage adjusted duration gap. Is the bank positioned to gain or lose money if interest rates rise? Estimate the change in market value...
Show
work
(40 Points) As the new management trainee at the Rossville Bank of Tennessee, you are given balance sheet, you have been asked by the bank president to determine the current mark-to-market balance sheet and modified durations for the bank's assets and liabilities. Fill in the blanks with market values and modified durations. Some of this information is already filled in. The bank has only three types of assets and two types of deposits. Amounts are in S thousands...
24. The balance sheet for Gotbucks Bank Inc. (GBI) is presented below ($ millions). $ 30 $ 20 50 Assets Cash Federal funds Loans (floating) Loans (fixed) Total assets Liabilities and Equity Core deposits Federal funds Euro CDs Equity Total liabilities and equity 105 130 20 65 $220 $220 Notes to the balance sheet: The fed funds rate is 8.5 percent, the floating loan rate is LIBOR (London Interbank Offered Rate) + 4 percent, and currently LIBOR is 11 percent....
Q1) Two banks are being examined by regulators to determine the interest rate sensitivity of their balance sheets. Bank A has assets composed solely of a 10-year $1 million loan with a coupon rate and yield of 12 percent. The loan is financed with a 10-year $1 million CD with a coupon rate and yield of 10 percent. Bank B has assets composed solely of a 7-year, 12 percent zero-coupon bond with a current (market) value of $894,006.20 $1,976,362.88. The...
4.4.
Gotbucks Bank, Inc. (in $millions) Assets Liabilities and Equity $ 41 Core deposits Cash Federal funds Loans (floating) 31 Federal funds 61 116 Euro CDs Loans (fixed) 76 Equity 17 Total assets S 264 Total liabilities and equity S 264 Notes to the balance sheet: Currently, the fed funds rate is 9.6 percent. Variable-rate loans are priced at 2 percent over LIBOR (currently at 10 percent). Fixed-rate loans are selling at par and have five-year maturities with 11 percent...
Below is some useful material.
A portfolio manager wants to estimate the interest rate risk of a bond using duration. The current price of the bond is 82. A valuation model found that if interest rates decline 30 basis points, the price will increase to 83.50 and if interest rates increase by 30 basis points, the price will decline to 80.75. What is the duration of this bond? [Read Attachment #1 before attempting.) Macaulay, Modified and Approximate Modified Durations Macaulay...
2. Use the following information to conduct a duration gap analysis. Assets Amount Rate Duration Cash $ 23,000 0% Bonds $102,000 7.2% 1.8 years Loans $375,000 11.0% 1.5 years Liabilities and Equity Small time deposits $130,000 3.6% 4 years Large CDs $ 70,000 6.3% | 1 year Interest checking $250,000 2.8% 3.3 years Equity $50,000 Calculate the leverage adjusted duration gap. Is the bank positioned to gain or lose money if interest rates rise? Estimate the change in market value...
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