Question

QUESTION 9

1. Bank Asset Bond A				Bank Liability L
   Settlement	6/27/2019			Settlement	6/27/2019
   Maturity	6/27/2029			Maturity	6/27/2022
   Rate	10%			Rate	8%
   Yield	8%			Yield	7%
   Redemption	100			Redemption	100
   frequency	2			frequency	2
   basis	0			basis	0
   price of bond				price of bond

   The price of the bank asset is between 105 and 107
   The price of the bank liability is 100

   It is true or false ?

   QUESTION 27 - One reasonable way for a significantly undercapitalized bank to raise capital is sell unproductive risky assets and use the proceeds to pay down debt. Regulators look at how much equity capital a bank has relative to risky assets. It is True or False ?

Answer 1

9. False.

a. Price of Bank asset:

Maturity =10yrs.

Coupon= 10% p.a. distributed semiannually

FV= 100

YTM=8% p.a.

MV or PV = 113.59 [use any financial calculator online]

b. Price of Bank Liability:

Maturity =3yrs.

Coupon= 8% p.a. distributed semiannually

FV= 100

YTM=7% p.a.

MV or PV = 102.66 [use any financial calculator online]

27. True. With the suggestion mentioned is appropriate. Assuming a long term liquidity requirement.

But in case there is short term liquidity requirement then it would be false. Bank can look towards other lines of credit which would come with more benefit than selling of assets.