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 isfinanced 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 maturityvalue 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 10percent.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? (Donot round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter the answers in dollars, notmillions of dollars. Round your answers to 2 decimal places. (e.g., 32.16))Bank 1Bank 2Before InterestRiseAsset ValueAfter InterestRiseDifferenceBefore InterestRiseLiabilities ValueAfter InterestRiseDifference

BOND PRICE:The bond price refers to the market value of a bond, which represents the present worth…

Answered: Bank 1 has assets composed solely of a…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 16P

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Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $1 million loan with a 12 percent yield to maturity. It Is financed with a 10-year, 10 percent coupon, $1 million CD with a 10 percent yleld to maturity. Bank 2 has assets composed solely of a 7-year, 12 percent, zero-coupon bond with a current value of $894,006.20 and a maturity value of $1,976,362.88. It is financed by a 10-year, 8.275 percent coupon, $1,000,000 face value CD with a yleld 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 liabilities of each bank?
Bank 1 has assets composed solely of a 10-year, 12.50 percent coupon, $2.4 million loan with a 12.50 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.4 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 12.50 percent, zero-coupon bond with a current value of $2,068,193.38 and a maturity value of $4,716,923.15. It is financed by a 10-year, 7.75 percent coupon, $2,400,000 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 liabilities of each bank?
Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $1 million loan with a 12 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $1 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 12 percent, zero-coupon bond with a current value of $894,006.20 and a maturity value of $1,976,362.88. It is financed with a 10-year, 8.275 percent coupon, $1,000,000 face value CD with a yield to maturity of 10 percent. All securities except the zero-coupon bond pay interest annually. If interest rates rise by 1 percent (100 basis points), how do the values of the assets and liabilities of each bank change?
Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 300 and equity 30.
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 %
Suppose the Federal Reserve sells a $3000 bond, and the reserve ratio maintained by all private banks is 20%. Assume that all loans are fully redeposited (zero “cash drains”) and that all deposits are checkable deposits. Determine the effect of the bond sale on total loans and deposits in the private banks. Explain in detail how these changes would occur. Illustrate the total result of the effects in part (1) using balance sheets for the consolidated private banks and the Federal Reserve, respectively. Discuss how the effects in part (1) would be different if: (i) the reserve ratio was 25% instead of 20%; (ii) a certain portion of loans were held as cash outside banks instead of being redeposited in the banks.
Suppose a bank enters a repurchase agreerment in which it agrees to sell Treasury securities to a correspondent bank at a price of $9.99,838 with the promise to buy them back at a price of $10.000,073. Calculate the yield on the repo if it has a 6-day maturity. (write your answer in percentage and round it to 2 decimal places)
A bank has an adjusted amount of $536 million in high-quality liquid assets, and $425 million in adjusted potential outflows, with an additional $75 million in adjusted derivative risk. What is the bank's LCR?
Suppose that the assets of a bank consist of $200 million of retail loans (not mortgages). The PD is 1% and the LGD is 70%. What is the risk-weighted assets under the Basel II IRB approach? What are the Tier 1 and Tier 2 capital requirements?
To calculate WACC of a firm, which of the following should be used as the cost of debt? - Bank deposit rate - Annual yield to maturity of the bond issued by this firm - Risk free rate - 3 Month T bill rate
a. Assume that the market interest rates were slightly higher than 9% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount? Explain. b. Independent of your answer to part a, assume that the proceeds were $14,820,000. Use the horizontal model (or write the journal entry) to show the effect of issuing the bonds. C. Calculate the interest expense that Coley Co. will show with respect to these bonds in its income statement for the fiscal year ended September 30, 2013, assuming that the discount of $180.000 is amortized on a straight-line basis.
A Canadian bank that issues AUD 250M 5-year bonds to fund AUD 200M loans with 6-year maturity is exposed to the following risks : A depreciation of the Australian dollar against the Canadian plus credit plus liquidity risk plus reinvestment risk, i.e. decreasing interest rates. A depreciation of the Australian dollar against the Canadian dollar, plus credit risk plus liquidity risk plus refinancing risk, i.e. increasing interest rates. An appreciation of the Australian dollar against the Canadian dollar, plus credit risk plus refinancing risk, i.e. increasing interest rates. An appreciation of the Australian dollar against the Canadian dollar, plus credit risk plus reinvestment risk, i.e. decreasing interest rates.

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