A bank has two investment options tochose from for short term investment:Option A: A money market securityissued by a multinational corporationwith a face value of $2000 with 120days to maturity to be traded for$1850.Option B: A 60-day tax exemptedgovernment bill with a face value of$2000 to be traded for $1950.The corporate tax rate on bankearnings is 40%.Which security would you chose based on theafter tax YTM return? Justify by showing yourcalculations appropriately.

Option A:- Face Value = $2,000 Current price = $1,850 Time Period = 120 Days Option B:- Face Value…

Answered: A bank has two investment options to…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose two firms want to borrow money from a bank for a period of one year. Firm A has excellent credit, whereas Firm B’s credit standing is such that it would pay prime + 3 percent. The current prime rate is 6.55 percent, the 30-year Treasury bond yield is 4.30 percent, the three-month Treasury bill yield is 3.47 percent, and the 10-year Treasury note yield is 4.23 percent. Now suppose that Firm B decides to get a term loan for 10 years. What is the loan rate for the firm? Firm B's loan rate % How does this affect the company’s borrowing cost? Company's borrowing cost will (increase/ remain the same / decrease) .
Third Mortgage Investors makes money by purchasing mortgage backed securities (MBS), stripping them into interest only (IO) and principal only (PO) components, and selling the components for more than it paid for the original security. Suppose the company purchases a $100,000 Face value MBS carrying a coupon of 9 percent and a maturity of 30 years. Assume for the purpose of the following analysis, the MBS will make payments on an “ANNUAL BASIS.” What is the remaining principal balance on the MBS if it survives 1-year? 3-years? 5 years? 8 years?
Suppose that you are the CFO of Google with an extra U.S. $20 Million to invest for one year. You are considering the purchase of U.S. T-bills that yield 4% per year. The spot exchange rate is $1.00 = €0.90, and the one-year forward rate is $1.00 = €0.95 . What must the interest rate in the Eurozone (on an investment of comparable risk) be before you are willing to consider investing there instead of the US? a. 9.78% b. 1.56% c. 4.00% d. 5.56%
Which of the following are characteristics of Treasury bills (T- bills)? Check all that apply. There is a secondary market for T - bills. Institutional investors can purchase T - bills. Individuals can purchase T- bills. T - bills have maturities of 28, 91, and 182 days. Suppose Mr. Smith buys a 30-day T - bill with a face value of $1,000 at a price of $ 996. The discount rate yield (DRY) would be, whereas the investment return yield (IRY) would be.
Suppose that the assets of a bank consist of $100 million of loans of BBB-rated corporations. The PD for the corporations is estimated as 1%. The average maturity is five years and the LGD is 60%. What is the total risk-weighted assets for credit risk under the Basel II advanced IRB approach? Question 5Answer a. $178.1 million b. $13.2 million c. $165.4 million d. $100 million
A firm has two possible investments with the following cash inflows. Each investment costs $435, and the cost of capital is seven percent. Use Appendix B and Appendix D to answer the questions. Assume that the investments are not mutually exclusive and there are no budget restrictions. Cash Inflows Year A B 1 $ 270 $ 170 2 140 170 3 100 170 Based on each investment’s net present value, which investment(s) should the firm make? Use a minus sign to enter negative values, if any. Round your answers to the nearest dollar. Investment A: $ Investment B: $ The firm should make . Based on each investment’s internal rate of return, which investment(s) should the firm make? Round your answers to the nearest whole number. Investment A: % Investment B: % The firm should make . Is this the same answer you obtained in part b? It the same answer as obtained in part b. If the cost of capital were to increase to 9 percent, which investment(s) should the firm…
Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $31,950,000, with the promise to buy them back at a price of $32,000,000. a. Calculate the yield on the repo if it has a 5-day maturity. b. Calculate the yield on the repo if it has a 15-day maturity. (For all requirements, use 360 days in a year. Do not round intermediate calculations. Round your percentage answers to 5 decimal places. (e.g., 32.16161)) a. b. X Answer is complete but not entirely correct. Yield on the repo Yield on the repo 1.02857 % 0.34286 %
Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. Assuming a required capital ratio of 8%, what is the capital amount the FI needs to hold against these exposures? ANSWER MUST BE 7.52 million
Consider an investment that pays off $700 or $1,400 per $1,000 invested with equal probability. Suppose you have $1,000 but are willing to borrow to increase your expected return. What would happen to the expected value and standard deviation of the investment if you borrowed an additional $1,000 and invested a total of $2,000? What if you borrowed $2,000 to invest a total of $3,000? Instructions: Complete the table below to answer the questions above. Enter your responses as whole numbers and enter percentage values as percentages not decimals (i.e., 23% not 0.23). Enter a negative sign (-) to indicate a negative number if necessary. Invest $1,000 Invest $2,000 Invest $3,000 Expected Value $ 1050 1200 $ $ 1300 Percentage 20 % 30 % 40 % Standard Deviation 300 600 900 Expected Return N/A Doubled Tripled
Suppose Federal National Mortgage Association sells mortgage-backed securities (MBS) backed by a fixed-rate mortgage portfolio having the following features: Current mortgage balance $300,000,000 Weighted average coupon rate (WAC) = 6% Weighted average maturity (WAM) = 360 months Current prepayment speed = 300 PSA %3D Pass-through rate (PT Rate) = 5.4% What is the amount of total cash flows that the investors of the agency MBS receive in Month 2? Oa. $1,948,883.93 O b. $1,948,915.93 O c. $1,798,915.93 O d. $2,098,659.47
(Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.6 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Return -4% 1% 6% 0.05 8% (Click on the icon in order to copy its contents into a spreadsheet.) Probability 0.05 0.35 0.55 a. The investment's expected return is 3.85%. (Round to two decimal places.) b. The investment's standard deviation is%. (Round to two decimal places.) C
1. Present value is the value today of a future cash flow or series of cash flows. Discounting is the process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding. Suppose a U.S. government bond promises to pay $2,249.73 three years from now. If the going interest rate on three-year government bonds is 4%, how much is the bond worth today? How would your answer change if the bond matured in 5 years rather than 3? What if the interest rate on the 5-year bond was 6% rather than 4%? How much would $1,000,000 due in 100 years be worth today if the discount rate was 5%? if the discount rate was 20%? 2. A dollar in hand today is worth more than a dollar to be received next year. Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest compounded annually. How much will you have when the CD matures? How would your answer change if the interest rate were 5% or 6% or 20%?

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