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Corporate Fin Focused Approach

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 1cM

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Question

Banks and other financial institutions have many unique features in their financial statements. When
we project the financial statements of a bank in the next few years, do we usually start with sales
forecast? When we conduct a valuation of a bank, do we usually estimate its entire firm value?
No; Yes
OYes: Yes
O No; No
O Yes; No

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Consider a bank with the following balance sheet (Shown in image):a) Calculate the equity (total asset – total liability) to asset ratio of the bank(Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the networth of the bank and the equity to asset ratio; d) In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation,the bank decides to raise cash (zero duration and zero convexity) from the equity holders.How much cash does the bank need to raise? e) Do you agree with the following statement? Explain why. “The information about a bond’s duration and convexity adjustment is sufficient to quantifyinterest rate risk exposure.”
None
You are analyzing how interest rates affect the equity value of a bank using a duration analysis. After examining the balance sheet of the bank, you noticed that the value of its total assets and liabilities are $400M and $360M, respectively. You also determined that the duration gap of the bank is equal to 4.0 years. Using a duration analysis, you would like to predict the response of the bank’s equity value (in percentage terms) to a 0.1 percent increase in the market interest rate. You decided to assume that a one percentage point change in the rate is approximately equal to a one percent change in the rate. Following this approach, determine the percentage response of the bank’s equity to this change in the market interest rate. Group of answer choices -0.4% -4.0% 0.4% -3.6% -0.1%
Construct a bank balance sheet with the following items : reserves , deposits , loans , securities , capital , and debt . Choose values so that the reserve -deposit ratio is 10 percent and the leverage ratio is 10. Give an example of a change in asset values that would push bank capital to zero . What happens when bank capital is gone ?
a)Calculate the equity (total asset –total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b)Calculate the duration and convexity of the both asset and liability sides; c)If the interest rates go up by 1%, using the duration and convexity ruleto determine the net worth of the bank and the equity to asset ratio; d)In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise? e)Do you agree with the following statement? Explain why.“The information about a bond’s duration and convexity adjustment is sufficient to quantify interest rate risk exposure.” please can you answer part d and e
Select all that are true regarding credit risk for a bank. O This risk is an estimate of future uncollectibility that results in a provision expense on the bank's income statement. O Changes in the business cycle affect all firms the same, so credit risk is pro-cyclical. O Despite it's significance to banks, the housing market is a small part of the economy and has little effect elsewhere so there is no impact to credit risk. Material changes in the housing market impacts banks and their credit risk significantly due to the relative size of the mortgage portfollos. O Business cycles create variations in this risk, but affect each borrower differently.
PLEASE SOLVE
Question No: 04 This is a subjective question, hence you have to write your answer in the Text-Field given below. "In case of financial institutions along with financial performance financial stability is also very crucial." Discus with suitable illustrations the ratios calculated in order to measure financial stability of a bank.
Our textbook claims that one of the key services banks provide is maturity intermediation: what exactly does this mean? (Choose an answer from the list below; only one is correct.) Reference: Chapter 11 and/or Chapter 1 Banks borrow money from their younger customers and lend it to their older customers. Banks gather small deposits and use them to make large investments, allowing small investors to collectively buy large assets. Banks are funded with deposits that they promise to return on demand but use them to make long-term loans, which creates a mismatch in the maturities of their assets & liabilities.
You manage a bank that has $500 million of fixed-rate assets, $600 million of rate-sensitive assets, $1000 million of fixed-rate liabilities, and $100 million of rate-sensitive liabilities. A. Do a gap analysis and show what will happen to bank profits if interest rates rise by 4%. Show your work. B. What happens to the bank’s profits if interest rates fall by 7%?
I need help answering A, B, and C, questions please in the pic.
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