The assets of a bank consist of $300 million of loans to A-rated corporations with the principalsbeing repayable at maturity. The Probability of Default for the corporation is estimated as 0.4% peryear. The loan maturities are three years and the LGD is 45%.1. What is the total risk-weighted assets for credit risk under the Basel II advanced IRB approach?2. How much Tier 1 and Tier 2 capital is required?

Both the Basel II standardised approach and the Basel I framework have substantially higher capital…

Answered: The assets of a bank consist of $300…

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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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?
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Assume that banks lend out all their excess reserves. Currently, the total reserves that banks hold equal $32.8 billion. If the Federal Reserve decreases its reserve requirement from 8.2 percent to 6 percent, then there is potential for the whole banking system to raise the money supply by: O $8.8 billion O $10 billion. $246 billion. O $146,7 billion O $256 billion.
PJ Morgan Bank has bank capital equal to 10% of total assets. Most of its deposits are short-term and adjustable rate. PJ Morgan's assets are long maturity and fixed rate. What is true of the bank? |- Bank capital will fall below 10% of total assets if interest rates increase. II - Bank profits will increase if interest rates drop. III - The bank will have to borrow from the Fed if interest rates increase. IV - The bank has a positive gap. O ,Il and IV O , II, II and IV O l and Il only O , II, and IV
3) Suppose there is a 10% reserve requirement, and the bank has the following Balance Sheet Assets Reserves Loans Securities Liabilities 55M Deposits 250M Bank Capital 45M 350M 50M Now, let's suppose there is a deposit outflow of $60 million. If the bank only finances its reserve shortages by borrowing from the Federal Reserve, show the bank's balance sheet after the deposit outflow and receiving the loan from the Fed.
The total in rate sensitive assets for a financial institution is $120 million and the total in rate sensitive liabilities is $95 million. What is the cumulative pricing gap (CGAP) and what is the interest rate sensitivity gap ratio if total assets equals $195 million? What would the projected change to net income be if interest rates rose by 2% on both assets and liabilities? What would the projected change to net income be if interest rates declined by 2% on both assets and liabilities? What would the projected change to net income be if interest rates rose by 1.8% on assets and 1.5% on liabilities? What would the projected change to net income be if interest rates declined by 1.8% on assets and 1.5% on liabilities?
AB Borda shall establish a risk-adjusted required rate of return as part of their investment analysis. The company has produced the following information: • The investment will be financed to 40% with bank loans and 60% with equity • The company's tax rate is 22% • The government bond for the intended investment period has an interest rate corresponding to 2% • The company has negotiated with the bank for a loan for the investment with an interest rate of 5%. • For the investment period, the company has an expectation that the index for the market portfolio will increase from the current 110 to 119.9 at the end of the investment period. • The company's intended investment has a covariance with a market portfolio of 120 and that the standard deviation for the market portfolio is 7.56. a) Calculate the company's nationally adjusted return requirement for the investment.
A bank offers a corporate client a choice between borrowing cash at 9% per annum and borrowing Bitcoin at -5% per annum. The risk-free interest rate is 3% per annum, and storage costs are 7% per annum. The interest rates on the two loans are expressed with annual compounding. The risk-free interest rate and storage costs are expressed with continuous compounding. Suppose that the price of Bitcoin is $58,000 and the corporate client wants to borrow $1,160,000. Discuss whether the rate of interest on the Bitcoin loan is too high or too low in relation to the rate of interest on the cash loan. What is the correct rate of interest for Bitcoin loan?
1. Present value is the value today of a future cash flow or series of cash flows. Discounting is the process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding. Suppose a U.S. government bond promises to pay $2,249.73 three years from now. If the going interest rate on three-year government bonds is 4%, how much is the bond worth today? How would your answer change if the bond matured in 5 years rather than 3? What if the interest rate on the 5-year bond was 6% rather than 4%? How much would $1,000,000 due in 100 years be worth today if the discount rate was 5%? if the discount rate was 20%? 2. A dollar in hand today is worth more than a dollar to be received next year. Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest compounded annually. How much will you have when the CD matures? How would your answer change if the interest rate were 5% or 6% or 20%?
If average daily remittances are $1 million, and extended disbursement float adds 12 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 15% on excess funds?
Assume a bank only has 10 days of liquidity in the base case scenario (i.e./ positive net cash flow) but it needs to push it out to 15 days to be compliant with an upcoming policy change. What action would it need to take in order to become compliant with the policy change? Issue 30-day debt and invest the proceeds in a 30-day asset Issue 30-day debt and invest the proceeds in an overnight asset Issue an overnight liability and invest the proceeds in a 30-day asset Issue an overnight liability and invest in an overnight asset
The management of ProdPharm.inc has decided to increase the production capacity of its factory by purchasing a new production line. This new acquisition will be financed by bank debt. The company consulted several banks to have the interest rate applied for this type of investment. Bank (A) charges an annual nominal rate of 12%. Bank (B) applies a semi-annually capitalized nominal rate of 11.8%. Bank (C) applies a quarterly capitalized nominal rate of 11.6%. Bank (D) applies a monthly compounded nominal rate of 11.5%. What is the rate monthly headcount best for the business? Show all your interest rate equivalence calculations. Keep 6 digits after the decimal point.

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