Question A DI has the following assets in its portfolio: $30 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 92 percent of the fair market value of the T-bills and 93 percent of the fair market value of its mortgage loans. If the DI waits one month to liquidate these assets, it would receive the full fair market value for each security. a) Calculate the one-month liquidity index using the previous information. b) Why would this DI be forced to sell the assets at fire sale prices? c) Explain liquidity index as a measure of liquidity risk.
Question A DI has the following assets in its portfolio: $30 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 92 percent of the fair market value of the T-bills and 93 percent of the fair market value of its mortgage loans. If the DI waits one month to liquidate these assets, it would receive the full fair market value for each security. a) Calculate the one-month liquidity index using the previous information. b) Why would this DI be forced to sell the assets at fire sale prices? c) Explain liquidity index as a measure of liquidity risk.
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
Related questions
Question
Question
A DI has the following assets in its portfolio: $30 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 92 percent of the fair market value of the T-bills and 93 percent of the fair market value of its mortgage loans.
If the DI waits one month to liquidate these assets, it would receive the full fair market value for each security.
a) Calculate the one-month liquidity index using the previous information.
b) Why would this DI be forced to sell the assets at fire sale prices?
c) Explain liquidity index as a measure of liquidity risk.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education