Imagine a bank that has raised $300M in funds (total funding raised) and invested these funds in a high-risk strategy. In this strategy, the assets (loans) generate a return equal to 8% with probability 90% and there is a 10% chance that the assets generate a return equal to -40%. For simplicity, there is only two dates in this example (today and tomorrow). The lender invests its funds today and the return on this strategy is delivered tomorrow (cash flows only take place tomorrow). The lender does not discount tomorrow's cash flows (independently of their risk). Suppose that 85% of the funds raised by the lender were deposits paying no interest. The deposits are insured by the deposit insurance fund. Calculate the value of the lender's equity today. 69.0 73.6 54.6 62.1 309.6

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
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Ee 421.

Imagine a bank that has raised $300M in funds (total funding raised) and invested these funds in a
high-risk strategy. In this strategy, the assets (loans) generate a return equal to 8% with probability
90% and there is a 10% chance that the assets generate a return equal to -40%. For simplicity, there
is only two dates in this example (today and tomorrow). The lender invests its funds today and the
return on this strategy is delivered tomorrow (cash flows only take place tomorrow). The lender does
not discount tomorrow's cash flows (independently of their risk).
Suppose that 85% of the funds raised by the lender were deposits paying no interest. The deposits
are insured by the deposit insurance fund.
Calculate the value of the lender's equity today.
69.0
73.6
54.6
62.1
O 309.6
Transcribed Image Text:Imagine a bank that has raised $300M in funds (total funding raised) and invested these funds in a high-risk strategy. In this strategy, the assets (loans) generate a return equal to 8% with probability 90% and there is a 10% chance that the assets generate a return equal to -40%. For simplicity, there is only two dates in this example (today and tomorrow). The lender invests its funds today and the return on this strategy is delivered tomorrow (cash flows only take place tomorrow). The lender does not discount tomorrow's cash flows (independently of their risk). Suppose that 85% of the funds raised by the lender were deposits paying no interest. The deposits are insured by the deposit insurance fund. Calculate the value of the lender's equity today. 69.0 73.6 54.6 62.1 O 309.6
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