A bank is able to issue a $500,000 worth of a 90-day commercial paper with a 2% discount yield and an equivalent size and risk 90-day certificate of deposit with a 3% single payment yield today. Prices of securities are quoted assuming no arbitrage, and hence the present value of all future cash flows for the securities are equivalent to their corresponding prices. The bank is considering the issuance of either the commercial paper or the certificate of deposit to replicate the effective-annual return (interest rate) of a zero-coupon bond currently included in the bank's portfolio. This bond is currently quoted in the market at $910.55 and matures in three years. The bond has the standard par value (face value) of $1,000 and a yield to maturity of 3.173%. Which security should the bank issue to replicate the effective-annual return of the zero-coupon bond? o Issue commercial paper Issue certificate of deposit

A bank is able to issue a $500,000 worth of a 90-day commercial paper with a 2% discount yield and an equivalent size and risk 90-day certificate of deposit with a 3% single payment yield today. Prices of securities are quoted assuming no arbitrage, and hence the present value of all future cash flows for the securities are equivalent to their corresponding prices. The bank is considering the issuance of either the commercial paper or the certificate of deposit to replicate the effective-annual return (interest rate) of a zero-coupon bond currently included in the bank's portfolio. This bond is currently quoted in the market at $910.55 and matures in three years. The bond has the standard par value (face value) of $1,000 and a yield to maturity of 3.173%. Which security should the bank issue to replicate the effective-annual return of the zero-coupon bond? o Issue commercial paper Issue certificate of deposit

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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The small firm wants a 1-year fixed-rate loan. A bank's base rate is 6.14 percent. Adjustment for default risk for this firm is 4.4 percent. Competitive risk factor adjustment is 1.8 percent. The bank's money market manager reports that 1-year Treasury securities sell for 0.85 basis points above a 3-month Treasury bill. Given this information, calculate the bank's loan-pricing for this firm. Round the answer to two decimal places. Please write % sign in the units box. Your Answer: Answer units
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Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $14,800,000, with the promise to buy them back at a price of $15,000,000. Calculate the yield on the repo if it has a 36-day maturity. (Do not round intermediate calculations. Round your answers to 4 decimal places. (e.g., 32.1642))
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Ab. 131.
Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 13.25 percent coupon, $2.7 million loan with a 13.25 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.7 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 13.25 percent, zero-coupon bond with a current value of $2,285,241.72 and a maturity value of $5,460,087.71. It is financed by a 10-year, 7.50 percent coupon, $2,700,000 face value CD with a yield to maturity of 10 percent. All securities except the zero-coupon bond pay interest annually. a. If interest rates rise by 1 percent (100 basis points), what is the difference in the value of the assets and llabilities of each bank? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter the answers in dollars, not millions of dollars. Round your answers to 2 decimal places. (e.g., 32.16)) Bank 1 Bank 2 Before Interest Rise Asset Value After…
(Round to the nearest cent.) Data Table (Click on the following icon in order to copy its contents into a spreadsheet.) Today is February 15, 2008 Issue Date Coupon Rale Maturity Date Current Type Price YTM Rating Yield Note Feb 2006 7.25% 2-15-2016 5.722% AAA Print Done %24
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For a bank that funds its fixed-rate loans with floating rate deposits whose cost varies with a the 3-month LIBOR, it can magnify its strategic interest rate exposure by entering into a plain vanilla interest rate swap where it receives the fixed-rate and pay the floating rate. True False

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