Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capitalwill not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumptionthat if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that aresecured (collateralized), it is expected that 40 percent of interest and principal will be collected.What is the concentration limit (as a % of capital) for secured loans made by this bank?A) 38.35%B 36.41%C 40.67%(D) 33.33%E 40.21%

1. Given Data:• Maximum loss allowed as a percentage of capital: 20% (0.20 as a decimal).• Expected…

Answered: Kansas Bank has a policy of limiting…

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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If money is not an economic resource, why is interest paid and received for its use? What considerations account for the fact that interest rates differ greatly on various types of loans? Use those considerations to explain the relative sizes of the interest rates on the following:a. A 10-year $1000 government bond.b. A $20 pawnshop loan.c. A 30-year mortgage loan on a $145,000 house.d. A 24-month $12,000 commercial bank loan to finance the purchase of an automobile.e. A 60-day $100 loan from a personal finance company.
(Fair Value Option) Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes. Any changes in fair value are due to changes in market rates, not credit risk. Carrying Value Fair Value December 31, 2017 $54,000 $54,000 December 31, 2018 44,000 42,500 December 31, 2019 36,000 38,000 Instructions(a) Prepare the journal entry at December 31 (Fallen’s year-end) for 2017, 2018, and 2019, to record the fair value option for these notes.(b) At what amount will the note be reported on Fallen’s 2018 balance sheet?(c) What is the effect of recording the fair value option on these notes on Fallen’s 2019 income?(d) Assuming that general market interest rates…
Suppose a bank currently has $250,000 in deposits and $27,000 in reserves. The required reserve ratio is 10%. If at the end of the day, there is an unexpected withdrawal of $4,000 in reserves, what is the bank's resulting reserve ratio (expressed as a %)? Using the information from the prior problem, how much would the bank need to borrow in either the Fed Funds market or at the discount window, to be in complicance with the required reserve ratio?
Suppose a company is choosing between bank loans and bonds. The interest rate in the bank loan is 3.5%, and an investment bank predicted that the company will pay close to 4% to issue a bond with the same maturity. In addition, fees are estimated to be higher for the bond issuance than for the bank loan. Explain why this company may still decide to issue the bond rather than borrowing through a bank.
Consider two local banks. Bank A has 100 loans outstanding, each for $1.3 million, that it expects will be repaid today. Each loan has a 3% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $130 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. a. The expected overall payoff of each bank. The expected overall payoff of Bank A is $☐ million. (Round to two decimal places.)
When firms enter into loan agreements with their bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. The firm had total current assets of $1,907,570,000 and current liabilities of $1,362,550,000. a. What is the firm's current ratio? b. If the firm were to expand its investment in inventory and finance the expansion by increasing accounts payable, how much could it increase its inventory without reducing the current ratio below 1.2? c. If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and short-term debt, how much would it have to reduce current assets to accomplish this goal? Question content area bottom Part 1 a. What is the firm's…
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CHAPTER 22. Finance companies and risk Which of the following actions would lessen the interest rate risk a finance company faces?A. Royal Crown no longer offers fixed-rate loans and has shortened the average life of its assets. B. Marshall Financial Inc. claims that they will approve loans for all borrowers regardless of credit history at a low interest rate. C. Wellspring Trust now receives all of its funds through borrowing rather than deposits. D. New Generation now offers fixed-rate loans with terms that are twice as long as they were before.
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. The Bank of Canada buys a government bond worth $750,000 from Eric, a client of First Main Street Bank. He deposits the money into his chequing account at First Main Street Bank. NOTE: the options for the LEFT dropdown question for ASSETS are (building and furniture or deposits or loans or networth or reserves) the options for the RIGHT dropdown question for ASSETS are ($150,000 or $600,000 or $750,000 or $1,800,000) the options for the LEFT dropdown question for LIABILITIES are (building and furniture or deposits or loans or networth or reserves) the options for the RIGHT dropdown question for LIABILITIES are ($150,000 or $600,000 or $750,000 or $1,800,000) the VERY last dropdown question at the bottom choices are ($375,000 or $3,000,000 or $3,750,000)
ABC Corporation got a $45 million line of credit of which it is expected to use 65%. ABC was given an 9% interest rate with a 1% front-end fee and a 1/2% commitment fee on the unused balances; a 7% compensating balance on any usage plus a 5% compensating balance on the total line. (The compensating balances earn zero interest.) The bank has a 15% reserve requirement. a) What is the bank’s effective yield on the line? b) What is the borrower’s effective cost? c) Suppose the borrower wants to exchange compensating balances for a higher interest rate, what would be the new rate of interest?
Consider two local banks. Bank A has 87 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 3% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $87 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. a. The expected overall payoff of each bank. The expected overall payoff of Bank A is $ million. (Round to the nearest integer.)
National Bank currently has $500 million in transaction deposits on its balance sheet. The current reserve requirement is 10 percent, but the Federal Reserve is decreasing this requirement to 8 percent.What is the balance sheet of the Federal Reserve and National Bank if National Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to National Bank as transaction deposits?

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