Calculate the value of (a) the mortgage pool and (b) the GNMA pass-through security in Problem 9 if market interest rates increase 50 basis points. Assume no prepayments.
> An employer uses a final pay formula to determine retirement payouts to its employees. The annual payout is 3 percent of the average salary over the employees’ last three years of service times the total years employed. Calculate the annual benefit under
> An employee with 25 years of service at a company is considering retirement at some time in the next 10 years. The employer uses a final pay benefit formula by which the employee receives an annual benefit payment of 3.5 percent of her average salary dur
> An employer uses a career average formula to determine retirement payments to its employees. The annual retirement payout is 5 percent of an employee’s career average salary times the number of years of service. Calculate the annual benefit payment under
> An employee contributes $15,000 to a 401(k) plan each year, and the company matches 10Â percent of this annually, or $1,500. The employee can allocate the contributions among equities (earning 12Â percent annually), bonds (earning 5
> Using the information in Problem 9, and assuming all variables remain constant over the next 15 years, what will your 401(k) fund value be in 15 years (when you expect to retire)? Data from Problem 9: Your company sponsors a 401(k) plan into which you
> What is a mutual fund? In what sense is it a financial institution?
> How do credit unions differ from savings institutions?
> How has the savings institution industry performed over the last several decades?
> What regulatory agencies oversee deposit insurance services to savings institutions?
> If we examine a typical bank’s asset portion of the balance sheet, how are the assets arranged in terms of expected return and liquidity?
> Classify the following accounts into one of the following categories: a. Assets b. Liabilities c. Equity d. Revenue e. Expense f. Off-balance-sheet activities (1) Service fees charged on deposit accounts (2) Retail CDs (3) Surplus and paid-in capital (4)
> How do loan sales and securitization help an FI manage its interest rate and liquidity risk exposures?
> Your employer uses a flat benefit formula to determine retirement payments to its employees. The fund pays an annual benefit of $2,500 per year of service. Calculate your annual benefit payments for 25, 28, and 30 years of service.
> Consider Table 23–3 again. a. What happens to the price of a call when: (1) The exercise price increases? (2) The time until expiration increases? b. What happens to the price of the put when these two variables increase? Table 23&acir
> Consider Table 23–3. What are the prices paid for the following futures options: a. December U.S. Treasury-bond calls at 17400. b. December 5-year Treasury puts at 12125. c. December Eurodollar calls at 9887. Table 23–
> In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk. a. A commercial bank plans to issue CDs in three months. b. An insurance company plans to buy bonds in two
> Give two reasons why credit swaps have been the fastest growing form of swaps in recent years.
> Match these three types of cash balances with the functions that they serve: a. Vault cash b. Deposits at the Federal Reserve c. Deposits at other FIs (1) Used to meet legal reserve requirements (2) Used to purchase services (3) Used to meet customer wit
> Distinguish between a swap seller and a swap buyer.
> Suppose that a pension fund manager anticipates the purchase of a 20-year, 8 percent coupon T-bond at the end of two years. Interest rates are assumed to change only once every year at year end. At that time, it is equally probable that interest rates wi
> Why can insolvency risk be classified as a consequence or outcome of any or all of the other types of risks?
> How is asset-side liquidity risk likely to be related to liability-side liquidity risk?
> Bank 1, with $130 million in assets and $20 million in costs, acquires Bank 2, which has $50 million in assets and $10 million in costs. After the acquisition, the bank has $180 million in assets and $35 million in costs. Did this acquisition produce eco
> Suppose an individual invests $10,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expense
> A British bank issues a $100 million, three-year Eurodollar CD at a fixed annual rate of 7 percent. The proceeds of the CD are lent to a British company for three years at a fixed rate of 9 percent. The spot exchange rate of pounds for U.S. dollars is £1
> Why would a DI be forced to sell assets at fire-sale prices?
> What has been the fastest-growing area of asset business for finance companies?
> Webb Bank has a composite CAMELS rating of 2, a total risk–based capital ratio of 10.2 percent, a Tier I risk-based capital ratio of 7.2 percent, a CET1 capital ratio of 6.4 percent, and a leverage ratio of 4.8 percent. Assuming the DIF reserve ratio is
> How does the degree of liquidity risk differ for different types of financial institutions?
> How does loan portfolio risk differ from individual loan risk?
> What does it mean when a bank has a CAMELS rating of 2? Of 4?
> What are compensating balances? What is the relationship between the amount of compensating balance requirement and the return on the loan to the FI?
> Why could a lender’s expected return be lower when the risk premium is increased on a loan?
> What components are used in the calculation of credit risk– adjusted assets?
> If a bank’s asset utilization ratio increases, what will happen to its return on equity, all else constant?
> Suppose an individual invests $20,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 2.5 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expen
> A money market mutual fund bought $1,000,000 of two year Treasury notes six months ago. During this time, the value of the securities has increased, but for tax reasons the mutual fund wants to postpone any sale for two more months. What type of risk doe
> Corporate bonds usually pay interest semiannually. If an FI decided to change from semiannual to annual interest payments, how would this affect the bond’s interest rate risk?
> Describe the trend in assets invested in 401(k) plans in the 1990s through 2010s.
> Describe the difference between a private pension fund and a public pension fund.
> How does a bank’s annual net income compare with its annual cash flow?
> What is the major feature in the estimation of credit risk under the Basel capital requirements?
> In what ways are securities firms and investment banks financial intermediaries?
> Which of the following assets or liabilities fit the one-year rate or re pricing sensitivity test? (LG 22-1) a. 91-day U.S. Treasury bills. b. 1-year U.S. Treasury notes. c. 20-year U.S. Treasury bonds. d. 20-year floating-rate corporate bonds with annua
> Why is the market value of equity a better measure of a bank’s ability to absorb losses than book value of equity?
> If interest rates rise and an investor holds a bond for a time longer than the duration, will the return earned exceed or fall short of the original required rate of return?
> An investor purchases a mutual fund share for $100. The fund pays dividends of $3, distributes a capital gain of $4, and charges a fee of $2 when the fund is sold one year later for $105. What is the net rate of return from this investment?
> An insurance company’s projected loss ratio is 64.8 percent and its expense ratio is 25.6 percent. The company estimates that dividends to policyholders will be 6 percent. What must be the minimum yield on investments to achieve a positive operating rati
> Assume an FI originates a pool of short-term real estate loans worth $20 million with maturities of five years and paying interest rates of 9 percent (paid annually). a. What is the average payment received by the FI (both principal and interest) if no p
> A DI has the following assets in its portfolio: $20 million in cash reserves with the Fed, $20 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 99 percent of the fair market
> The Acme Corporation has been acquired by the Conglomerate Corporation. To help finance the takeover, Conglomerate is going to liquidate the overfunded portion of Acme’s pension fund. The assets listed below are going to be liquidated.
> The Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 million in core deposits. Calculate (a) the financing gap and (b) the financing requirement.
> Industrial Corporation has a net income-to-sales (profit margin) ratio of 0.03, a sales-to-assets (asset utilization) ratio of 1.5, and a debt-to-asset ratio of 0.66. What is Industrial’s return on equity?
> In Problem 6, how might we determine whether these ratios reflect a well-managed, creditworthy company? Data from Problem 6: Consider the following company’s balance sheet and income statement. Income Statement Sales (all on credit)
> Consider the following company’s balance sheet and income statement. Income Statement Sales (all on credit) ………………
> Metro bank offers one-year loans with a 9 percent stated rate, charges a ¼ percent loan origination fee, imposes a 10 percent compensating balance requirement, and must pay a 6 percent reserve requirement to the Federal Reserve. What is the return to the
> Suppose today a mutual fund contains 2,000 shares of J.P. Morgan Chase, currently trading at $64.75, 1,000 shares of Walmart, currently trading at $63.10, and 2,500 shares of Pfizer, currently trading at $31.50. The mutual fund has no liabilities and 10,
> Country bank offers one-year loans with a stated rate of 10 percent but requires a compensating balance of 10 percent. What is the true cost of this loan to the borrower?
> Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.10, X2 = Retained earnings/Total assets = 0.20, X3 = Earnings before interest and taxes/Total assets = 0.22, X4 = Market
> Jane Doe earns $30,000 per year and has applied for an $80,000, 30-year mortgage at 8 percent interest, paid monthly. Property taxes on the house are expected to be $1,200 per year. If her bank requires a gross debt service ratio of no more than 30 perce
> Your employer uses a final pay formula to determine retirement payments to its employees. You have 20 years of service at the company and are considering retirement sometime in the next 10 years. Your employer uses a final pay formula by which you receiv
> An insurance company’s projected loss ratio is 77.5 percent, and its expense ratio is 23.9 percent. It estimates that dividends to policyholders will add another 5 percent. What is the minimum yield on investments required in order to maintain a positive
> Calculate the following: a. If the loss ratio on a line of property insurance is 73 percent, the loss adjustment expense is 12.5 percent, and the ratio of commissions and other acquisitions expenses is 18 percent, is this line profitable? b. How does you
> An insurance company collected $12.75 million in premiums and disbursed $9.18 million in losses. Loss adjustment expenses amounted to 20.1 percent and dividends paid to policyholders totaled 5 percent. The total income generated from the company’s invest
> Using the Tier, I leverage-ratio requirement, what is the bank’s minimum regulatory capital requirement to keep it in the adequately capitalized zone? Data for Problem 14: A bank’s balance sheet information is shown
> Does the bank have enough capital to meet the Basel requirements, including the capital conservation buffer requirement? Data for Problem 16: A bank’s balance sheet information is shown below (in $000). On-Balance-Sheet Items
> To be adequately capitalized, what are the bank’s CET1, Tier I, and total risk–based capital requirements under Basel III? Data for Problem 13: A bank’s balance sheet information is show
> A mutual fund has 300 shares of General Electric, currently trading at $30, and 400 shares of Microsoft, Inc., currently trading at $54. The fund has 1,000 shares outstanding. a. What is the NAV of the fund? b. If investors expect the price of General El
> You have been asked to analyze First Union Bank. You have only the following information on the bank at year-end 2018: Net income is $250,000, total debt is $2.5 million, and the bank’s debt ratio is 55 percent. What is First Union Bank’s ROE for 2018?
> Every town Bank has the following ratios: a. Profit margin: 5% b. Asset utilization: 20% c. Equity multiplier: 7.75× Calculate Every town’s ROE and ROA.
> Any town Bank has the following ratios: a. Profit margin: 21% b. Asset utilization: 11% c. Equity multiplier: 12× Calculate Any town’s ROE and ROA.
> An insurance company collected $3.6 million in premiums. and disbursed $1.96 million in losses. Loss adjustment expenses amounted to 6.6 percent and dividends paid to policyholders totaled 1.2 percent. The total income generated from their investments wa
> How would your answer for part (b) in Problem 9 change if the relationship of the price sensitivity of futures contracts to the price sensitivity of underlying bonds were [Δ R f / (1 + R f ) / ΔR / (1 + R) ] = br = 0.92?
> Community Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities. If the bank earns $159,000 in noninterest income, incurs $306,000 in noninterest expenses, and pays $3,320,000 in taxes, what is its net inc
> Smallville Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities. If the bank earns $120,000 in noninterest income, incurs $80,000 in noninterest expenses, and pays $2,500,000 in taxes, what is its net inc
> XYZ, Inc. has issued 10 million new shares of stock. An investment bank agrees to underwrite these shares on a best efforts basis. The investment bank is able to sell 8.4 million shares for $27 per share, and it charges XYZ $0.675 per share sold. How muc
> The financial statements for MHM Bank (MHM) are shown below: a. Calculate the dollar value of MHM’s earning assets. b. Calculate the dollar value of MHM’s interest-bearing liabilities. c. Calculate MHMâ€
> The MEP company has issued 5,000,000 new shares. Its investment bank agrees to underwrite these shares on a best efforts basis. The investment bank is able to sell 4,200,000 shares for $54 per share. It charges MEP $1.25 per share sold. How much money do
> Open-end Fund A has 165 shares of ATT valued at $35 each and 30 shares of Toro valued at $75 each. Closed-end Fund B has 75 shares of ATT and 72 shares of Toro. Both funds have 1,000 shares outstanding. a. What is the NAV of each fund using these prices?
> Your employer uses a career average formula to determine retirement payments to its employees. You have 20 years of service at the company and are considering retirement sometime in the next 10 years. Your average salary over the 20 years has been $50,00
> In 2018, Webb Sports Shop had cash flows from investing activities of $2,567,000 and cash flows from financing activities of $3,459,000. The balance in the firm’s cash account was $950,000 at the beginning of 2018 and $1,025,000 at the end of the year. C
> A bank is considering an investment in a municipal security that offers a yield of 6 percent. What is this security’s tax equivalent yield if the bank’s tax rate is 35 percent?
> An investor purchases a mutual fund for $50. The fund pays dividends of $1.50, distributes a capital gain of $2, and charges a fee of $2 when the fund is sold one year later for $52.50. What is the net rate of return from this investment?
> How do the financial asset holdings of defined benefit pension funds differ from those of defined contribution pension funds? Explain the differences.
> What are the major assets held by private pension funds in 1975 versus 2016? Explain the differences.
> What is the difference between an open-end mutual fund and a closed-end fund? What is the difference between an open end mutual fund and a unit investment trust?
> What are the principal demographics of household owners of mutual funds?
> What are the economic reasons for the existence of mutual funds?
> How does the risk of short-term funds differ from that of long-term funds?
> An investment bank pays $33.50 per share for 4 million shares of GM in a firm commitment stock offering. It then can sell those shares to the public for $32 per share. How much money does GM receive? What is the profit to the investment bank? What is the
> Using the data in Table 17–2, discuss the growth and ownership holdings over the last 36 years of long-term funds versus money market funds. Table 17–2: 1980 1990 1999 2002 2007 2008 2009 2011 2013 2016 Panel A:
> What are money market mutual funds? In what assets do these funds typically invest? What factors caused the strong growth in this type of fund over various periods from 1992 through 2009?
> What are long-term mutual funds? In what assets do these funds usually invest? What factors caused the strong growth in this type of fund during the 1990s and the decline in growth in the early and late 2000s?
> What is the difference between domestic hedge funds and offshore hedge funds? Describe the advantages of offshore hedge funds over domestic hedge funds.
> What types of fees do hedge funds charge?
> What are the different categories of hedge funds?
> What is a hedge fund and how is it different from a mutual fund?
> How have global mutual funds grown relative to U.S.-based mutual funds?
> What benefits do mutual funds have for individual investors?
> Discuss the improper trading abuses and improper assignment of fees for which mutual funds were prosecuted in the early 2000s.
