To verify this further, examine the IPO for Blue Nile, Inc. It can be found on the SEC’s site at: http://www.sec.gov/Archives/edgar/data/1091171/000089161804001024/v97093b4e424b4.htm What was the offering price? What percent was retained by the underwriter?
> Calculate the income gap for a financial institution with rate-sensitive assets of $20 million and rate-sensitive liabilities of $48 million. If interest rates rise from 4% to 4.8%, what is the expected change in income?
> Explain what effect a large federal deficit might have on interest rates.
> A bank’s balance sheet contains interest-sensitive assets of $280 million and interest-sensitive liabilities of $465 million. Calculate the income gap.
> Given the estimates of duration in Problem 27, how should the Friendly Finance Company alter the duration of its liabilities to immunize its net worth from interest-rate risk? Data from Problem 27: If the manager of the Friendly Finance Company revises
> Given the estimates of duration found in Problem 27, how should the Friendly Finance Company alter the duration of its assets to immunize its net worth from interest-rate risk?
> If the manager of the Friendly Finance Company revises the estimates of the duration of the company’s assets to two years and liabilities to four years, what is the effect on net worth if interest rates rise by 3 percentage points?
> Given the estimates of duration in Problem 21, how should the bank alter the duration of its liabilities to immunize its net worth from interest-rate risk? Data from Problem 21: If the manager of the First National Bank revises the estimates of the dura
> Given the estimates of duration in Problem 21, how should the bank alter the duration of its assets to immunize its net worth from interest-rate risk?
> If the manager of the First National Bank revises the estimate of the percentage of fixed-rate mortgages that are repaid within a year from 20% to 10%, what will be the revised estimate of the interest-rate risk the bank faces? What will happen to profit
> Calculate the duration of a $100,000 fixed-rate 30-year mortgage with a nominal annual rate of 7.0%. What is the expected percentage change in value if the required rate drops to 6.5% immediately after the mortgage is issued?
> A bank issues a $100,000 fixed-rate 30-year mortgage with a nominal annual rate of 4.5%. If the required rate drops to 4.0% immediately after the mortgage is issued, what is the impact on the value of the mortgage?
> A bank issues a $100,000 variable-rate 30-year mortgage with a nominal annual rate of 4.5%. If the required rate drops to 4.0% after the first six months, what is the impact on the interest income for the first 12 months?
> Last month, corporations supplied $250 billion in bonds to investors at an average market rate of 11.8%. This month, an additional $25 billion in bonds became available, and market rates increased to 12.2%. Assuming a Loanable Funds Framework for interes
> Given the estimates of duration in Table 23.2, what will happen to the Friendly Finance Company’s net worth if interest rates rise by 3 percentage points? Will the company stay in business? Why or why not? Table 23.2 TABLE 23.2 Dura
> If the Friendly Finance Company raises an additional $20 million with commercial paper and uses the funds to make $20 million of consumer loans that mature in less than one year, what happens to its interest-rate risk? In this situation, what additional
> If the manager of the Friendly Finance Company decides to sell off $10 million of the company’s consumer loans, half maturing within one year and half maturing in greater than two years, and uses the resulting funds to buy $10 million of Treasury bills,
> If the manager of the First National Bank revises the estimates of the duration of the bank’s assets to four years and liabilities to two years, what is the effect on net worth if interest rates rise by 2 percentage points?
> Given the estimates of duration in Table 23.1, what will happen to the bank’s net worth if interest rates rise by 10 percentage points? Will the bank stay in business? Why or why not? Table 23.1: Weighted Duration (years) Amount
> If the manager of the First National Bank revises the estimate of the percentage of checkable deposits that are rate-sensitive from 10% to 25%, what will be the revised estimate of the interest-rate risk the bank faces? What will happen to profits next y
> If the First National Bank decides to convert $5 million of its fixed-rate mortgages into variable-rate mortgages, what happens to its interest-rate risk? Explain with income gap and duration gap analyses
> The manager for Tyler Bank and Trust has the following assets and liabilities to manage: If the manager wants a duration gap of 3.00, what level of saving accounts should the bank raise? Assume that any difference between assets and liabilities is held
> Springer County Bank has assets totaling $180 million with a duration of five years, and liabilities totaling $160 million with a duration of two years. If interest rates drop from 9% by 75 basis points, what is the change in the bank’s capitalization ra
> The following financial statement is for the current year. From the past, you know that 10% of fixedrate mortgages prepay each year. You also estimate that 10% of checkable deposits and 20% of savings accounts are rate-sensitive. What is the current inco
> Consider a $1,000-par junk bond paying a 12% annual coupon. The issuing company has 20% chance of defaulting this year; in which case, the bond would not pay anything. If the company survives the first year, paying the annual coupon payment, it then has
> Calculate the income gap given the following items: • $8 million in reserves • $25 million in variable-rate mortgages • $4 million in checkable deposits • $2 million in savings deposits • $6 million of 2-year CD’s
> Calculate the duration of a commercial loan. The face value of the loan is $2,000,000. It requires simple interest yearly, with an APR of 8%. The loan is due in four years. The current market rate for such loans is 8%.
> The value of a $100,000 fixed-rate 30-year mortgage falls to $89,537 when interest rates move from 5% to 6%. What is the approximate duration of the mortgage?
> What are the principal advantages often cited as motivation for a private equity buyout?
> Why would an investment banker advise a firm to issue a security using best efforts rather than underwriting?
> Is it better for a security issue to be fully subscribed or oversubscribed?
> Why do investment banking firms often form syndicates for selling securities to the public?
> Does the fact that a security has passed an SEC review mean that investors can buy the security without having to worry about taking a loss on the investment?
> What are the primary services that an investment banker will provide a firm issuing securities?
> What does it mean to say that investment bankers underwrite a security offering? How is this different from a best-efforts offering?
> You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity. You plan on selling the bond in one year and believe that the required yield next year will have the following probability distribution: Probability……………….Required Yield 0.1……
> What law separated investment banking and commercial banking?
> What was the motivation behind legislation separating commercial banking and investment banking?
> Why do commercial banks object to brokerage houses being allowed to offer many of the services traditionally reserved for banks?
> Is it possible to make money if you know that the price of a security will fall in the future? How?
> What is the difference between a market order and a limit order?
> What valuable service do dealers provide that facilitates transaction trading and keeping the markets liquid?
> What is the difference between a hostile takeover and a merger?
> You want to buy 100 shares of a stock currently trading at $50 per share. Your brokerage firm allows margin sales with a 50% opening margin and a maintenance margin of 25%. What does this mean? If you close your position with the shares at $53.50, what i
> For Blue Nile, Inc., what are the expected proceeds to the company? Is this certain? What assumptions are you making? How would you verify this?
> The limit order book for a security is: The specialist receives the following, in order: a. Market order to sell 300 shares b. Limit order to buy 100 shares at 25.38 c. Limit order to buy 500 shares at 25.30 How, if at all, are these orders filled? Wha
> The demand curve and supply curve for bonds are estimated using the following equations: As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a result, the new market interest rate increased to 19.65
> What effect might a fall in stock prices have on business investment?
> Mr. Doerr of Kleiner Perkins Caufield & Byers owned a significant number of shares. What was the market value of these shares at the end of the first day of trading?
> What were the total proceeds from this offering? What part was retained by Amazon? What part by the investment bankers? What percentage of the offering is this?
> Refer back to the IPO of eBay presented in the problems for Chapter 13. What were the fees for eBay as a percentage of funds raised? Does a pattern emerge? Data for Problem 4: In the IPO, the firm issued 3,000,000 news shares. The initial price was $18.
> What was the market value of Amazon.com following its first day as a publicly held company?
> How are insurance companies able to predict their losses from claims accurately enough to let them price their policies such that they will make a profit?
> Are most insurance companies organized as mutuals or stock companies?
> Distinguish between independent agents and exclusive agents.
> How do insurance companies protect themselves against losses due to adverse selection and moral hazard?
> Distinguish between adverse selection and moral hazard as they relate to the insurance industry.
> As in Question 6, the demand curve and supply curve for bonds are estimated using the following equations: Following a dramatic increase in the value of the stock market, many retirees started moving money out of the stock market and into bonds. This
> What is information asymmetry, and how does it affect insurance companies?
> Why do insurance companies not allow people to buy insurance on personally unrelated risks?
> Why do people choose to buy insurance even if their expected loss is less than the payments they will make to the insurance company?
> Why is Social Security in danger of eventually going bankrupt?
> What is a pay-as-you-go pension plan?
> Why have private pension plans grown rapidly in recent years?
> Distinguish between defined-benefit and definedcontribution pension plans.
> What is the purpose behind reinsurance?
> What risks do property and casualty insurance policies protect against?
> What is the difference between term life insurance and whole life insurance?
> An economist has estimated that, near the point of equilibrium, the demand curve and supply curve for bonds can be estimated using the following equations: a. What is the expected equilibrium price and quantity of bonds in this market? b. Given your
> Assume that life expectancy in the United States is normally distributed with a mean of 73 years and a standard deviation of 9 years. What is the probability that you will live to be over 100 years old?
> Research indicates that the 1,000,000 cars in your city experience unrecoverable losses of $250,000,000 per year from theft, collisions, and so on. If 30% of premiums are used to cover expenses, what premium must be charged to car owners?
> Paul’s car slid off the icy road, causing $2,500 in damage to his car. He was also treated for minor injuries, costing $1,300. His car insurance has a $500 deductible, after which the full loss is paid. His health insurance has a $100 deductible and cove
> An employee contributes $200 a year (at the end of the year) to her pension plan. What would be the total contributions and value of the account after 5 years? Assume that the plan earns 15% per year over the period.
> A home products manufacturer estimates that the probability of being sued for product defects is 1% per year per product manufactured. If the firm currently manufactures 20 products, what is the probability that the firm will experience no lawsuits in a
> Kio Outfitters estimated the losses and probabilities from past experience in the table in the next column. What is the probability Kio will experience a loss of $5,000 or greater? If an insurance company offers a loss policy with a $1,500 deductible, wh
> Your rich uncle dies, leaving you a life insurance policy worth $100,000. The insurance company also offers you an option to receive $8,225 per year for 20 years, with the first payment due today. Which option should you use?
> When opening an IRA account, investors have two options. With a regular IRA account, funds added are not taxed initially, but are taxed when withdrawn. With a Roth IRA, the funds are taxed initially, but not when withdrawn. If an investor wants to contri
> A client needs assistance with retirement planning. Here are the facts: • The client Dave is 21 years old. He wants to retire at 65. • Dave has disposable income of $2,000/month. • The IRA Dave has chosen has an average annual return of 8%. If Dave contr
> How does an index fund differ from an actively managed fund?
> If mortgage rates rise from 5% to 10%, but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses?
> Discuss why a mutual fund family may find it beneficial to offer 50 or 60 different stock mutual funds.
> Distinguish between an open- and closed-end mutual fund.
> Considering the discussion of market efficiency from Chapter 6, discuss whether you should be willing to pay high fees to mutual fund investment managers.
> What is meant by liquidity intermediation?
> What features of mutual funds and the investment environment have led to mutual funds’ rapid growth in the last two decades?
> What regulatory changes have been adopted or are being considered to deal with abuses in the mutual fund industry?
> What is market timing when referred to by mutual funds?
> What is late trading when referred to by mutual funds?
> What is the primary source of the conflict of interest between shareholders and investment managers?
> What do 12b-1 fees pay, and what is the maximum amount these fees can be?
> If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?
> What prompted the growth of money market mutual funds?
> What distinguishes a hedge fund from other types of mutual funds?
> How are deferred loads usually structured?
> What is a load fund?
> A mutual fund offers “A” shares, which have a 5% upfront load and an expense ratio of 0.76%. The fund also offers “B” shares, which have a 3% back-end load and an expense ratio of 0.87%. Which shares make more sense for an investor looking over an 18-yea
> A mutual fund charges a 5% upfront load plus reports an expense ratio of 1.34%. If an investor plans on holding a fund for 30 years, what is the average annual fee, as a percent, paid by the investors?
> Unhappy with the results, the new investor then sells the 389.09 shares. What is his profit? What is the new fund value?
> On January 1 a mutual fund has the following assets and prices at 4:00 p.m. Calculate the net asset value (NAV) for the fund. Assume that 8,000 shares are outstanding for the fund. Stock Shares owned Price 1 1,000 $1.97 5,000 $48.26 3 1,000 $26.44
> A $1 million fund is charging a back-end load of 1%, 12b-1 fees of 1%, and an expense ratio of 1.9%. Prior to deducting expenses, what must the fund value be at the end of the year for investors to break even?
> A mutual fund reported year-end total assets of $1,508 million and an expense ratio of 0.90%. What total fees is the fund charging each year?
